Deciphering the VA Lender’s Handbook Chapter 6 Part 3
In the last article we talked about the veteran’s statement and the lender’s certification – two documents that essentially have the same purpose: verify in writing that both parties know what they’re getting themselves into and are OK with it. We also talked about what closing costs can be rolled into the loan (pretty much all of them) and a little bit about options that a borrower has when it comes to getting their closing costs paid for. This article is going to address the oft-asked question of when can a borrower receive cash at closing on an IRRRL? We will also talk about the maximum loan amount available on an IRRRL.
The first thing a borrower should know about receiving cash at closing is that an IRRRL cannot be used to take equity out of the property or pay off any debts other than the mortgage being refinanced through the IRRRL. Right there, most borrower’s hopes for getting “cash out” or taking equity out of their homes in an IRRRL are dashed. The loan amount in an IRRRL can only be used to pay off the existing VA loan and cover the cost of closing on the IRRRL. The VA is strict about this to the point where the refinancing loan will be rounded down instead of up to avoid paying any cash to the borrower. However, like every rule, there is an exception.
The single exception to this rule is that the veteran can be reimbursed up to $6,000 for any energy efficiency improvements that have already been completed within 90 days before the closing date of the loan. It’s important to specify what this exception is and what it is not. This exception is not a check to pay for future energy efficient improvement, nor is it a check to pay for energy efficient improvements that are years old. In some cases, the loan proceeds can be applied to energy-efficient improvements in a way that does not involve cash reimbursement to the veteran. More detail on this will come in the articles about Chapter 7.
There are, of course, things that can happen in the natural course of loan closing not specific to the IRRRL process that may result in the borrower receiving cash. Things like computational errors, changes in the final pay-off figures, up-front fees paid that are later added to the loan, and a refund of the escrow balance on the old loan. These will usually not exceed $500 and if they do, the VA must be consulted to make sure that the cash amount paid to the borrower is acceptable. Lenders will know the difference between an equity withdrawal and cash from these administrative circumstances.
It is often asked what the maximum loan amount on VA loans, and also IRRRLs are. For an IRRRL, the maximum loan amount available is whatever the existing loan balance that is being refinanced is, plus any late fees, the closing costs, the VA funding fee, and the cost of any energy efficiency improvements. For an IRRRL that includes late fees, it must be submitted to the VA for prior approval regardless of whether the lender has automatic authority. If you are refinancing your VA loan to an IRRRL because you are no longer able to make the payments on the original loan, you should be prepared for more complication than in a normal IRRRL.
Remember that there is no theoretical maximum amount for a VA loan, and since an IRRRL rolls all of the above items into the principal of the new loan, and the VA guarantees at least 25% of the loan, the loan amount might end up higher than the limits established by a secondary market. The lender is responsible for making sure the loan is marketable. Why does this matter to you as a borrower? Because the lender will make decisions based on their need to sell the loan on the market, and what they are willing to offer you will depend on those decisions. While many loans will not run into any issues with this, some borrowers may get frustrated that a lender is unwilling to do what is perfectly allowed by the VA. Their inability to sell the loan after making it could very well be a factor.