Cashback at Closing on VA Loans Mortgage Lending Guidelines

This blog addresses the topic of obtaining cashback when closing on VA loans. We’ve received numerous inquiries in recent weeks regarding cashback at closing on VA loans, with the recurring question being, “Can a veteran receive cashback at closing on a purchase transaction?” Mike Gracz, a leading VA loan originator at Gustan Cho Associates, provides insights into cashback when closing on VA loans.

It’s crucial to note that there is a 2% cap for discount points on all VA mortgages.

While the answer is yes, there are specific restrictions, and this blog will outline the permissible cash amount and the associated guidelines. Given that different lenders may have varying perspectives on this matter, we have contacted the VA directly and will share the insights obtained from that conversation in this article.

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What is Cashback Option in Mortgage?

A cash-back option in a mortgage allows borrowers to receive a lump sum of money at the closing of the home loan. This amount is typically a percentage of the mortgage and can be utilized for various purposes, such as covering closing costs, undertaking home improvements, or addressing other financial needs.

It provides borrowers additional flexibility and liquidity at the outset of the loan, offering a financial cushion or the means to enhance the newly purchased property.

It’s important to note that not all mortgages include a cashback option, and the terms can vary among lenders. Borrowers should carefully review the specifics of the mortgage agreement to understand how the cash-back amount is determined, any associated costs, and whether there are limitations on its use.

Consulting with a mortgage professional can clarify the availability and implications of a cash-back option based on individual financial circumstances.

Can You Get Cash Back on a VA loan?

Getting a cashback at closing on VA Loans for purposes other than the home purchase or certain allowable costs is not a standard program feature. The VA loan is mainly designed to help individuals purchase a home. The loan amount is generally based on the appraised value of the property and the borrower’s capacity to repay the loan.

Suppose you need additional funds for other purposes. If that is the case, you should explore other financing alternatives, including a home equity loan or a line of credit, once you have established equity in your property. It is vital to thoroughly evaluate your financial circumstances and seek advice from a mortgage expert to comprehend the consequences of various loan choices.

How Much Cashback at Closing on VA Loans Can Borrowers Get?

How much cash can a veteran get cashback at closing on VA loans? On a purchase transaction, the veteran cannot receive money back at closing besides upfront costs associated with the loan. Dale Elenteny of Gustan Cho Associates on how much cashback at closing on VA loans borrowers can get:

A veteran can receive cashback in earnest money down, appraisal fees, and inspection costs. The veteran can only recuperate loan costs already paid out of pocket at the closing table when the seller has agreed to pay these costs with a seller credit.

Repair costs paid for by the seller, credits for repairs, and unused closing costs credits are not allowed to be collected by the veteran as cashback at closing on VA loans. Any leftover seller credits may be used for a principal reduction of the loan amount or applied to discount points to lower the interest rate.

Recent Case Scenario On Cashback At Closing On VA Loans

In an illustrative case, a Veteran is in the process of purchasing a home. The buyers gave $2,000 as earnest money and spent $500 for an appraisal and $350 for a home inspection. The purchase contract includes a $7,000 seller credit. After factoring in closing costs and escrow, the Veteran needs to bring $5,000 to closing.

Examining the scenario reveals a $2,000 difference between the seller credit and the required closing amount. Given that the Veteran has already paid $2,850 in upfront costs (including earnest money, appraisal, and home inspection), there’s an opportunity for the Veteran to receive $2,000 back at closing. This approach ensures that seller credit is accounted for.

States With Property Tax Proration Credit And Cashback At Closing On VA Loans

Regarding states with property taxes paid in arrears, understanding tax prorations in the mortgage industry can be challenging. Many homeowners need to familiarize themselves with the collection process for property taxes. Alex Carlucci from Gustan Cho Associates sheds light on states with property tax prorations:

Property taxes are paid a year behind in states like Alabama, Colorado, Illinois, Iowa, Mississippi, Nebraska, New Mexico, South Carolina, Texas, and Wisconsin. This means that in 2022, these states are collecting property taxes due for 2021. Homebuyers in these states receive a tax proration at closing.

For example, if you were closing on your home on August 1st, 2022, you wouldn’t be responsible for property taxes from 1/1/2022 through 7/31/2022. At closing, the seller would credit you for the property taxes due for that timeframe. Despite its complexity, this process is crucial to grasp.

For more information, feel free to reach out to Gustan Cho Associates. Direct contact can be made at 800-900-8569, via text for a quicker response, or through email at alex@gustancho.com .

Need Help With Property Tax Proration And Cashback? Contact Us Today!

What Does The Department Of Veterans Affairs Say About Cashback At Closing On VA Loans

The VA has advised us that tax prorations may not be refunded to the borrower as cashback at closing. They recommend a principal reduction with the tax prorations. A principal reduction will be applied directly to the total amount owed on your mortgage. John Strange of Gustan Cho Associates explains how borrowers can get cashback at closing on VA loans:

The VA has heard of situations where tax prorations as a cashback have been allowed. A formal request must be sent to the VA by your lender to allow the veteran to receive tax preparations as cashback. It is not a guarantee they will allow it.

The request to the Veterans Administration for cashback of property tax proration funds must state, ” All closing costs and pre-paid items have already been paid, and there is nowhere else for the money to be applied.” Then the VA will grant or deny this request.

VA Mortgage Escrow Guidelines

In this section, we will discuss escrow accounts and VA mortgages. The good news for escrow accounts on a VA mortgage is that you must have one. Dale Elenteny explains how VA mortgage escrow accounts work as follows:

An escrow account will collect 1/12th of the property tax bill due each month, so when taxes are due next, there is enough in your account to pay the tax bill in full. Having an escrow account protects both the borrower and the lender. The escrow account ensures the lender that property taxes will be paid in full yearly.

The benefits of escrow accounts help the bar over budget by automatically collecting money for taxes in the total mortgage payment. The escrow account keeps your property tax budget out of sight and mind.

VA Refinance And Cashback At Closing On VA Loans

IRRRL – Interest rate reduction refinance loans, often called IRRRLs, do not allow the veteran to receive cash at closing except for a few circumstances. See the list below:

changes in final payoff figures
upfront fees paid for such as the appraisal (IF NEEDED)
refund of the current escrow account

See our VA IRRRL BLOG for more specific qualifications.

What is the back end ratio for a VA loan?

While the Department of Veterans Affairs (VA) does not impose a strict maximum back-end ratio, lenders commonly look for a 41% or lower ratio. Lenders may consider higher ratios in certain cases if strong compensating factors, such as a stable employment history, substantial cash reserves, or an excellent credit score, are present.

The back-end or debt-to-income (DTI) ratio is a key factor in evaluating eligibility for a VA loan. This ratio represents the percentage of a borrower’s gross monthly income allocated to all debts, including the prospective mortgage payment.

Borrowers must understand that individual lender policies may vary, and maintaining a lower back-end ratio improves the likelihood of loan approval. Borrowers should align their financial situation with lender guidelines and consider consulting with a mortgage professional to assess specific requirements based on their unique circumstances.

Rate And Term Refinance Mortgage Guidelines

In this section, we will cover rate and term refinance mortgage guidelines. A rate and term refinance is when a veteran attempts to get a lower rate or change the term of their current loan. This is full documentation refinance and does require an appraisal. Once again, the veteran is not allowed to receive cash in hand at the end of this transaction, except for the upfront costs associated with the loan.

Cash-Out Refinance Mortgage Guidelines

In this section, we will cover cash-out refinance mortgages on VA loans. A veteran may receive cash at closing if participating in a VA cash-out refinance. Please see our VA CASH OUT BLOG for more information. John Strange explains the benefits of VA loans compared to other mortgage loan programs as follows:

VA loans are the best mortgage loan program in the nation. VA loans have no minimum credit score requirements or maximum debt-to-income ratio caps. Furthermore, there are no maximum loan limit, no annual mortgage insurance, and competitive rates.

The team at Gustan Cho Associates are experts in all VA mortgage financing. We participate in many programs for our veterans, such as HOMES FOR HEROES and VA RENOVATION MORTGAGES. We strive to be updated on all VA mortgage guidelines as they constantly change. Our team is available seven days a week and available on holidays. Click here for more about cash- out Refinance mortgage guidelines

FAQs about Cashback at Closing on VA Loans Mortgage Lending Guidelines

1. Can a veteran receive cashback at closing on a purchase transaction for a VA loan? Yes, veterans can receive cashback at closing on VA loans, limited to upfront costs paid, with a 2% cap for discount points.
2. How much cashback can borrowers get at closing on VA loans? Veterans can receive cashback up to the upfront costs paid, not exceeding repair costs, seller credits, or closing costs.
3. Are there specific guidelines for cashback when closing on VA loans? Yes, the amount is tied to upfront costs paid out of pocket. The blog provides a detailed example.
4. What does the Department of Veterans Affairs say about cashback at closing on VA loans? The VA advises that tax prorations may not be refunded as cashback and recommends a principal reduction.
5. What is the back-end ratio for a VA loan? While the VA doesn’t set a strict ratio, lenders typically look for a 41% or lower back-end ratio.
6. Can veterans receive cash at closing in a rate and term refinance or cash-out refinance on a VA loan? In a rate and term refinance, veterans can’t receive cash, except for upfront costs. In a cash-out refinance, cash is possible with specific guidelines.