Just FYI: HUD will typically only allow up to 3% in "seller paid buyer closing costs" even though the VA loan will allow up to 6%. This must be negotiated at the time of initial offer negotiations and HUD will look at the highest "NET" sale price during that bidding period when deciding on an offer to accept. HUD will not allow you to make VA required lender repairs so you must choose an appropriate HUD property to purchase but there are many out there.
You can not recieve money back on a VA loan other than what you put ot for Appraisal,Inspections and EMD. However the VA does allow you to use up to 6% of the purchase price if you are able negotiate with the seller, that you can then apply to closing cost and debt payoff example (credit card car loan ect). I work with VA buyers everyday and 95% of the time I am able to get the VET in a home with no money down, a portion of debt payed off and EMD back in the VET'S hand. The home must pass VA appraisal guidelines for this to happen.
The problem with using your VA loan on a HUD home is the condition of the home you are hoping to purchase. HUD homes are "as is" and often need repairs. The VA will not give you 100% financing on a home that needs work. They are not concerned with cosmetic issues like out of date kitchens or bathrooms so ugly is acceptable as long as everything is working well. However, if it needs any type of repair or replacement that could be a safety issue or would need to be completed to protect the home from further damage (leaky roof), the VA appraiser will not approve the loan. I am surprised your lender, or your Realtor did not inform you of this potential problem.
I would not use my VA to buy a HUD home. Hud and VA have different repair requirements it is very likely you could end up with an issue. Hud is not flexiable and is limited on closing cost as well. I would use my VA for a property with a private seller where you can get all of your cost paid .
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