When the time comes to commit to the purchase of a home with a VA mortgage, one of the things borrowers must do is negotiate the interest rate on the loan with the lender.
Depending on circumstances, the most competitive interest rates might not be available due to a variety of factors. Sometimes credit scores, loan repayment history, or even the current day’s interest rate sheet may play a role in what interest rates are available to you at that time.
What can a borrower do to get into a lower interest rate in such circumstances? Sometimes the borrower may choose the option to buy discount points in order to lower the overall interest rate. How do these discount points work? A discount point is equal to 1 percent of the loan amount. On a $200,000 loan, one discount point would cost $2,000.
VA Pamphlet 26-7, Chapter Three, has some answers. “Veterans may pay reasonable discount points on VA-guaranteed loans. The amount of discount points is whatever the borrower and lender agree upon. Discount points can be based on the principal amount of the loan after adding the VA funding fee, if the funding fee will be paid from loan proceeds.”
Policies can vary, but lenders may cap the definition of “reasonable discount points” at a 2 percent max.
Depending on circumstances the VA borrower may be required to pay for some or all discount points out-of-pocket, but Chapter Three describes some situations where this may not apply. When can discount points be included in the VA loan amount?
“Discount points may be rolled into the loan only in the case of refinancing loans, subject to the following limitations:
A maximum of two discount points can be rolled into the loan. If the borrower pays more than two points, the remainder must be paid in cash.
Loans to refinance are:
Any reasonable amount of discount points may be rolled into the loan as long as the sum of the outstanding balance of the loan plus allowable closing costs and discount points does not exceed the VA reasonable value.”
So what about VA Cash Out Refinancing? While the discount points cannot specifically be included in the amount of the loan, “the borrower can receive cash from loan proceeds, subject to maximum loan limits…the cash received by the borrower can be used for any purpose acceptable to the lender, including payment of reasonable discount points.”