Cashback At Closing On VA Loans Mortgage Lending Guidelines

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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

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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 mgracz@gustancho.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

Cash-Out Refinance:

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!