Cashback At Closing On VA Loans Mortgage Lending Guidelines
This article covers Cashback At Closing On VA Loans Mortgage Lending Guidelines
Multiple times over the past few weeks we have been asked the same question about Cashback At Closing On VA Loans.
- “Can a veteran receive cash back at closing on a purchase transaction?”
- The short answer is yes, but there are certain restrictions
- In this blog, we will detail how much cash you may receive and the guidelines behind that figure
- Many lenders see this topic differently
- We have contacted the VA directly and are going to share the information from that phone call with you in this article
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
- Meaning a veteran can receive cashback in the amount of earnest money down, appraisal fee, and inspection costs
- The veteran is only allowed to recuperate loan cost 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 seller credits leftover may be used for a principal reduction of the loan amount or applied to discount points to lower the interest rate
- Please keep in mind there is a 2% cap for discount points on all VA mortgages
In short, the veteran may only receive Cashback At Closing On VA Loans in the amount they have already paid in upfront costs associated with the real estate transaction.
Recent Case Scenario On Cashback At Closing On VA Loans
EXAMPLE Recent Case Scenario On Cashback At Closing On VA Loans:
- A Veteran is under contract to buy a home
- They put down $2,000 in earnest money, paid $500 for an appraisal and $350 for a home inspection
- They received a seller credit of $7,000 which is listed on the purchase contract
- After all closing costs and escrow, the Veteran needs to bring $5,000 to closing
- As you can see there is a $2,000 difference between the seller credit and amount needed to close
- Since the Veteran has paid $2,850 in upfront costs (earnest money, appraisal, and home inspection), the Veteran may receive $2,000 back at closing
This way he does not leave any seller credit on the table.
States With Property Tax Proration Credit And Cashback At Closing On VA Loans
What about states with property taxes paid in arrears?
- Tax prorations are a difficult concept to grasp in the mortgage business
- The majority of homeowners do not understand how their property taxes are collected
- What does it mean to pay your property taxes in arrears?
- In states such as Alabama, Colorado, Illinois, Iowa, Mississippi, Nebraska, New Mexico, South Carolina, Texas, and Wisconsin to name a few, property taxes paid a year behind
- Paying taxes in arrears means during the calendar year of 2019, the states are collecting property taxes due for the calendar year of 2018
- You’re always paying the previous year’s property tax bill when collected
- In these states, the buyer gets a tax proration at closing
- Let’s say you are closing on your home on August 1st, 2019
- You are not responsible for the property taxes from 1/1/2019 through 7/31/2019
- At closing, the seller will credit you for the property taxes due for that timeframe
- As mentioned above, this can be incredibly confusing
Please reach out to Gustan Cho Associates for more information. You can contact Mike Gracz directly on 630-659-7644 or text us for a faster response. Or send an email to email@example.com.
What Does The Department Of Veterans Affairs Say About Cashback At Closing On VA Loans
At this time, 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
- That being said, 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
This request must state “all of the 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
Escrow account and VA mortgages
- The good news for this issue on a VA mortgage is you are required to have an escrow account
- 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
- This protects both the borrower and the lender
- This ensures the lender that property taxes will be paid in full every single year
- This helps 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 out of mind.
VA Refinance And Cashback At Closing On VA Loans
IRRRL – Interest rate reduction refinance loans often referred to as 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.
Rate And Term Refinance Mortgage Guidelines
Rate and Term Refinance:
- A rate and term refinance are when a veteran is attempting 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
- A veteran may receive cash at closing if they are participating in a VA Cash-out refinance
Please see our VA CASH OUT BLOG for more information
Gustan Cho Associates Mortgage Group 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 up to date on all VA mortgage guidelines as they are constantly changing. Our team is available 7 days a week and available on holidays. Please call Mike Gracz on 630-659-7644 with any VA mortgage questions!
August 15, 2020 - 5 min read