Payment of Discount Points and Fees from Loan Proceeds

In most VA transactions, receiving cash back at the closing table is strictly prohibited. For purchase loans and IRRRLs, the loan amount must be adjusted to ensure the borrower does not receive equity-based cash. However, minor cash returns are allowed for specific situations like the refund of items for which you previously paid cash, such as earnest money. Additionally, you may receive cash reimbursement for energy efficiency improvements up to $6,000 if the work was completed within 90 days before the loan closing. Adjustments for computational errors are also permissible.

The VA regulates exactly which fees a Veteran can pay to ensure they are not overcharged. You can pay reasonable and customary amounts for specific “Itemized Fees,” such as recording fees, credit reports, and hazard insurance, plus a lender’s flat charge not exceeding one percent of the loan amount. While these fees are usually paid in cash at closing for a purchase, they can be paid from the cash proceeds of a cash-out refinance or rolled into an IRRRL. The one percent flat charge covers the lender’s overhead costs.

Special rules apply when you are refinancing a construction loan, an installment land sales contract, or a loan with an interest rate higher than the proposed new rate. For these specific refinancing types, reasonable discount points can be included in the loan amount. However, the total loan balance—including the outstanding debt, allowable closing costs, and discount points—cannot exceed the property’s “Reasonable Value” as determined by a VA appraisal. If the combined total of these items is higher than the appraised value, you must pay the difference in cash.

If you wish to avoid paying closing costs in cash but do not want to roll them into the loan balance, you may negotiate a lender-paid arrangement. Lenders are permitted to set the interest rate on your new loan high enough to enable the lender to pay all closing costs and discount points. While this results in a slightly higher interest rate for the life of the mortgage, it allows you to close the transaction with little to no money due upfront. This option is common in both IRRRLs and standard purchase transactions.

The Interest Rate Reduction Refinance Loan (IRRRL), often called a streamline refinance, allows for the most extensive financing of costs. You can include all allowable fees and charges from the “Itemized Fees and Charges” list, the lender’s flat charge, and the VA funding fee directly into the new loan balance. This ensures you do not have to pay these expenses out of pocket. The final loan amount is calculated by taking the existing VA loan balance and adding these permitted costs, provided the final result meets VA’s recoupment and interest rate standards.

A common misconception about VA loans is that all costs can be rolled into the mortgage. While the program offers a no-down-payment option, standard closing costs for a purchase loan—such as title fees, appraisals, and recording taxes—cannot be financed into the loan amount. These expenses can add up to thousands of dollars and typically must be paid in cash at closing. However, Veterans can manage these costs by receiving gift funds from relatives or negotiating with the seller to pay all or a portion of the closing costs as a concession.

The VA funding fee is a one-time charge used to help sustain the home loan program for future generations of Veterans. One of the most veteran-friendly features of this benefit is that the funding fee can always be financed into the loan amount, regardless of whether you are purchasing a home or refinancing. This applies even if adding the fee causes your total loan balance to exceed the property’s appraised “Reasonable Value”. By rolling this fee into the mortgage, you effectively reduce the immediate cash needed to close your loan.

A VA-backed cash-out refinance provides significant flexibility for Veterans who want to tap into their home equity. Unlike purchase loans, this refinancing option allows you to use the liquid cash proceeds generated by the loan to cover your allowable fees, charges, and discount points. Because you can borrow up to 100 percent of the property’s appraised value, these costs are essentially subtracted from the total equity you are extracting. This arrangement allows you to settle all transaction-related expenses without needing to provide out-of-pocket cash at the time of your loan closing.

When using an Interest Rate Reduction Refinance Loan (IRRRL) to lower your monthly payment, you have the option to finance your closing costs. However, there is a specific regulatory limitation on the number of discount points you can roll into the new loan balance. Only a maximum of two discount points can be included in the total IRRRL amount. If you and your lender agree on a higher number of points to secure an even lower interest rate, any points exceeding the two-point limit must be paid in cash at the time of closing.

Discount points are a one-time fee paid to the lender to reduce your interest rate. For VA-backed purchase loans, these points are considered a closing cost and cannot be financed into the loan amount. You must pay these points in cash at the closing table from your own resources or negotiate for the seller to pay them on your behalf. While the VA allows you to negotiate any reasonable amount of points, they must be paid upfront rather than rolled into the mortgage balance for a standard home purchase. This rule ensures the base loan amount remains strictly tied to the property’s reasonable value.