Can I Get Cash Back at Closing of a Streamline?
VA streamlines, also known as Interest Rate Reduction Refinance Loans, or IRRRLs, are interesting beasts. They are quite different from a new purchase loan or even a cash-out refinance. The purpose of an IRRRL is to help a veteran get a lower interest rate on their existing VA loan with as little hassle as possible. Since the purpose of an IRRRL has nothing to do with getting cash back, it doesn’t have a whole lot of options for borrowers looking to get cash for something out of their mortgage. That being said, there are a few ways that you can (sort-of) get cash out as a result of your IRRRL. We’ll cover the ways that you can get cash back on an IRRRL, after we go into detail about what the IRRRL is and why it doesn’t offer a straightforward cash-out option.
In a normal refinance, a borrower is able to get cash out because they have a certain amount of equity in their home. A borrower is limited in how much cash they can get out by how much equity they have. In order to calculate equity, a VA appraisal needs to be done on the home. Since, in an IRRRL, a VA appraisal does not take place, the value of the home and thus the amount of equity the borrower has in the home cannot be calculated, therefore, since the lender has no way of knowing how much cash the borrower would be eligible to receive, no cash can be given to the borrower at closing. Giving the borrower cash-out on the refinance also increases the loan amount above what the borrower still owes on the home, which brings into question whether the borrower has sufficient income and reliable employment to cover the new loan. In order to determine that, income and employment verification must be done. Since the lack of a VA appraisal and income verification are two of the biggest things that make an IRRRL a “streamline” option, it would defeat the purpose of the IRRRL program to offer cash back.
Now, hopefully that makes sense and it is clear that the VA isn’t just saying ‘No’ to cash-out on IRRRLs because they want to. The only ‘real’ way to get cash back on an IRRRL is to not get cash back from the IRRRL itself, but to get an EEM (Energy Efficiency Mortgage) on top of the new loan. You can get an EEM with your IRRRL without complicating the process too much, and an EEM can be made for as much as $6,000. The catch? An EEM can only be used for making energy-efficient improvements to the home that is securing the new loan. The second catch? The VA itself (and most lenders) demands very detailed information on the improvements being made. You will need to get quotes from professionals, price out materials at a home improvement store, and come up with a fairly precise estimate of how much money you need to make the improvements. The changes will need to be analyzed (your lender can help with this) and projected savings on monthly utility bills need to be calculated. If the improvements aren’t going to save more money than they cost within a reasonable time frame, they will not be approved.
There are two other ways you could possibly end up with cash in your pocket at the end of an IRRRL: you might get a small refund for any amounts for which you were overcharged due to a miscalculation or error in the loan process. The VA limits this amount to $500 (if a lender makes more than $500 worth of errors, you may want to consider switching lenders). The other way is a possible refund of your existing escrow balance from the old loan. The only way this amounts to actual cash back is if the balance in your existing escrow was higher than it needed to be (you were paying slightly more into the escrow account than was actually needed to pay insurance and property taxes).
So getting cash back on an IRRRL is only an option if you want to get an EEM and make energy-efficient improvements to your house, and it’s a lot of homework to get that.