Deciphering the VA Lender’s Handbook Chapter 8 Part 4
We’re going to cover two topics in this post that the VA Lender’s Handbook covers in Chapter 8. First we’re going to talk about what happens to fees and charges if the loan never closes, and then we’re going to talk about what fees and charges the VA allows to be added to the loan amount (financed as part of the loan). First, any out-of-pocket expenses that the borrower incurs such as the appraisal and credit report will not get refunded if the loan doesn’t close. However, if the lender has already collected their 1% origination fee, and the loan doesn’t close, the lender is required to refund the fee to the borrower. It does not matter why the loan didn’t close, even if the borrower jumped ship and went with another lender, the original lender must still refund the origination fee if it has been charged.
There is a lot of confusion as to whether the VA funding fee can be rolled into the loan amount, and whether other closing costs or fees and charges can be as well. As for the VA funding fee itself, the VA Lender’s Handbook offers unequivocal clarification as follows: “For all types of VA loans, the loan amount may include the VA funding fee.” So, no matter what kind of VA loan you are getting, you will be able to roll the cost of the funding fee into the loan. However, the Handbook is equally clear on other fees and charges, clearly stating that, aside from the VA funding fee, no fees and charges can be included in the loan amount for new purchase loans and construction loans. For refinancing loans, each type of refinancing loan has its own stipulations for what things can be added to the loan amount.
For cash-out refinances (which, for the purposes of this information, include any type of refinancing other than a streamline refinance), only the VA funding fee, and the amount borrowed for an Energy Efficiency Mortgage (ask a VA loan officer or check out the EEM article from Chapter 7 of this series if you don’t know what this is), can be actually added to increase the loan amount. However, the set of allowable fees and charges, including discount points, can be paid from the cash proceeds of the loan. If you’re wondering how this is functionally different from just rolling the costs into the loan amount…(shrug) it really isn’t; it’s mostly just semantics, since your loan amount increases based on the amount of cash you’re taking out, but you can take cash out for any purpose acceptable to the lender, and once the cash is out it’s yours to do with as you will, so feel free to use it to pay closing costs.
VA Streamline refinances are different beasts, altogether. The official name for VA streamlines is Interest Rate Reduction Refinance Loan or IRRRL for short. The IRRRL is awesome because, as a streamline, its purpose is to provide a way for VA borrowers to refinance as quickly, easily, and cheaply as possible. As part of that, the VA allows for borrowers to get an IRRRL with literally no money down for closing costs, funding fee, or anything else. Any of the allowable fees and charges discussed in earlier articles on this chapter can be rolled into the loan amount, including the funding fee and the lender’s flat origination fee. This also includes up to two discount points. Any points above two cannot be rolled into the loan amount.
On loans that are refinancing a construction loan, an installment land sales contract, or a loan assumed by the veteran at an interest rate higher than that for the proposed refinancing loan, the loan amount can include the allowable fees and charges (closing costs) and reasonable discount points. However, there is a limitation on the maximum loan amount as follows, straight from the Lender’s Handbook:
• the sum of the outstanding balance of the loan being refinanced plus allowable
fees and charges (other than the funding fee) plus discount points, or
• VA reasonable value of the property, plus
• VA funding fee, plus
• the cost of any energy efficiency improvements.