Veterans Affairs (VA) loans can be a great option for veterans and their families who are looking to purchase or refinance a home. VA loans have more rules and regulations than conventional mortgages, but this can work in the buyer’s favor. One benefit is that VA loans can cover a portion of the closing costs. There is also a limit and fees that lenders are not allowed to charge with a VA loan.
Key Takeaways
- VA loans typically do not cover all closing costs, but there are ways to negotiate with the seller or lender to cover some of these costs.
- The VA funding fee is a one-time fee that is required for all VA loans, but it can be rolled into the loan amount to help reduce out-of-pocket expenses.
- Some closing costs that VA loans do not cover include appraisals,inspections and prepaid expenses like property taxes and insurance.
What Are Closing Costs on a VA Loan?
Closing costs are a set of expenses that a homebuyer can expect to pay in addition to the down payment before closing on the home. These expenses cover several important services that happen during the closing process, including the home appraisal and real estate attorney fees if a real estate attorney is required in your state. Closing costs also include homeowners insurance and property taxes for the remainder of the year. Not only do closing costs cover the essential services that are necessary to close on the home, but they also set the homeowner up for success moving forward.
The average closing cost for a conventional mortgage loan is typically between 3% and 6% of the loan amount, whereas the closing costs for a VA loan can be as low as 1% of the loan amount.
Types of VA Loan Closing Costs
Several closing costs come with a VA loan, much like other mortgage loan types.
1. Loan Origination Charge
The loan origination fee is charged by lenders to cover the costs of originating, processing and underwriting the loan. Buyers typically cover this cost, and the VA caps the amount that a mortgage lender can charge at 1% of the total loan amount.
2. Credit Report
Credit reports are used by lenders when determining your eligibility for the loan. The buyer pays for this fee, and the mortgage lender can request payment for this fee before providing a loan estimate. Typically, credit report fees are less than $30.
3. Appraisal Fee
Buyers who are using a VA loan have to get and pay for a VA appraisal. The VA determines the cost for appraisals, and it can vary based on where the home is located. There is a list of appraisal fees and timelines on the VA’s website.
4. Title Charges
Title charges include title insurance for both the lender and the buyer. It helps protect lenders and homebuyers if there are title-related issues such as liens detected after closing on the home. Lenders typically only require the buyer to purchase title insurance for the lender, but it is a good idea to purchase homeowner’s title insurance as well. Title insurance fees are a one-time fee that is generally between 0.5% and 1% of the home’s purchase price.
5. VA Funding Fee
The VA funding fee is a one-time fee that the recipient of the VA loan must pay at the time of closing on the home. The fee amount varies based on the down payment that is placed on the home but can range between 1.25% and 3.3% of the loan. There are some exceptions in which the recipient of the VA loan may not have to pay the VA funding fee, including if the recipient is receiving VA compensation for a service-related disability.
6. Discount Points
With VA loans, buyers have the option of purchasing discount points in exchange for a lower interest rate. Discount points are an upfront fee that is typically equal to 1% of the total loan amount, and each point lowers the interest rate by 0.25%. By taking advantage of this opportunity, buyers can reduce their total interest paid throughout the lifetime of the loan in addition to lowering the monthly payment.
Each lender is allowed to set a limit for how many discount points a buyer can purchase, and typically most lenders allow a maximum of four discount points.
7. Nonallowable Fees
One of the unique features of VA loans is the set of nonallowable fees. The VA does not allow loan recipients to pay this set of fees as a way to reduce the financial burden on veterans when purchasing or refinancing a home. The guideline used is often referred to as the 1% rule. The 1% rule states that loan recipients cannot be charged more than 1% for certain nonallowable fees. If a lender is following the 1% rule and charging the buyer a flat fee that is equal to 1% of the loan, they cannot charge for:
- Document preparation fees
- Escrow fees
- Interest rate lock-in fees
- Lender appraisals or inspections
- Loan application and/or processing fees
- Loan closing or settlement fees
- Photographs of the home and property
- Postage costs
- Real estate broker or trustee fees
- Tax service fees
What Fees Cannot Be Charged on a VA Loan?
VA loans are flexible to make homeownership more affordable for veterans and their family members. However, some costs come with purchasing a home that cannot be included in a VA loan. This includes:
- Moving costs
- Utility setup or installation fees
- Home repairs or upgrades
Buyers are responsible for these costs. Sellers can be asked to cover home repairs or upgrades as part of the sale agreement, but they do not need to accept those terms.
How Much Can VA Loans Cover for Closing Costs?
You can’t roll over all of the closing costs into VA loans, but you can roll the VA funding fee into the total loan amount. This will allow you to pay for the funding fee over time along with the rest of your mortgage instead of paying for it upfront. You’ll have to pay interest on the funding fee if you roll it into your VA home loan.
For example, if your VA loan is for $150,000 and your funding fee is 2%, that is equal to $3,000. If you roll this 2% funding fee into your loan, your total loan amount will increase to $153,000.
Who Pays the Closing Costs on a VA Loan?
As with most mortgage loans, the buyer is responsible for most of the closing costs of a VA loan. This includes the origination fee, funding fee and mortgage points. The buyer can ask the seller to pay for a portion of these fees, but the seller cannot pay for the entirety of the closing costs.
Lenders also have to cover some closing costs in the case of VA loans because of nonallowable fees. This often includes the remainder of an origination fee that exceeds 1% of the loan amount, brokerage fees, attorney’s fees and inspection fees.
Seller Concession: How Does It Work?
Seller concessions are when the seller pays for a portion of the closing costs that are usually paid by the buyer. In some cases, the seller covers a total percentage of costs, and in other cases, the seller covers specific costs such as property taxes or title insurance. Buyers can request seller concessions, but sellers are not obligated to agree to them. The VA has a limit on the maximum seller concessions — sellers cannot pay more than 4% of the home’s sale price.
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Next Steps to Get a VA Loan
If you are interested in buying a house and meet the eligibility requirements, a VA loan is an option that is worth exploring. To get started, you can start searching for lenders mentioned above and applying for preapprovals. You should also ensure that you have the funds to cover the closing fees that come along with a VA loan. When you have your preapproval and a plan for paying closing costs, you can connect with a real estate agent in your area who understands VA loan requirements to find your dream home.
Frequently Asked Questions
Can I finance my closing costs with a VA loan?
You can’t use the VA loan to cover all of your closing costs, but you can use it to finance your VA funding fee.
Is there a limit on the amount of closing costs a VA loan can cover?
In most cases, the VA funding fee is the only closing cost that can be included in the VA loan.
How can I estimate my closing costs for a VA loan?
You can estimate your closing costs using the above information and your home’s purchase price and/or the total VA loan amount.