VA Loan Closing Costs

Question: Do You Pay Closing Costs With A VA Loan?

When considering a VA loan for purchasing a home, a common question arises: "Do you pay closing costs with a VA loan?" The straightforward answer is yes, but there's much more nuance to this issue, as VA loans come with unique benefits and structures designed to reduce the financial burden on eligible borrowers. In this detailed explanation, we'll explore what closing costs are, the specific costs associated with VA loans, and how these costs can potentially be minimized or financed.

Understanding Closing Costs

Closing costs are the fees and expenses that buyers and sellers incur to finalize a real estate transaction. These costs can range from 2% to 5% of the purchase price of the home. They typically include a variety of fees such as:

1. Loan Origination Fee: Charged by the lender for processing the loan application.
2. Appraisal Fee: Covers the cost of a professional appraiser to estimate the value of the property.
3. Title Search and Title Insurance: Ensures the property's title is clear of liens and other issues.
4. Recording Fees: Charged by the local government to record the new mortgage and deed.
5. Inspection Fees: For home and pest inspections to assess the property condition.
6. Attorney Fees: May be required in some states to handle the closing process.
7. Prepaid Costs: Include homeowners insurance, property taxes, and interest that accrues before the first mortgage payment is due.

VA Loan Specifics on Closing Costs

While VA loans do require the payment of closing costs, there are specific restrictions and benefits:

VA Non-Allowable Fees

One significant advantage of a VA loan is the cap on closing costs. The Department of Veterans Affairs (VA) prohibits lenders from charging certain fees, known as "VA non-allowable fees." These include:

• Attorney Fees: In many cases, these are considered non-allowable unless required by state law.
• Brokerage Fees: Commissions for services such as mortgage brokers are not allowed.
• Prepayment Penalties: Charges for paying off the loan early are prohibited.
• Settlement Charges: That should be covered by the lender or seller.

VA Allowable Fees

The VA does allow certain fees to be charged to borrowers, which might include:

• Origination Fee: The VA limits this to 1% of the loan amount.
• Appraisal Fee: Typically necessary for the VA to determine the property's value.
• Credit Report Fee: For checking the borrower's credit history and score.
• Title Fees: Including search and insurance, as needed.
• Recording Fees: To enter official mortgage documents into public records.

VA Funding Fee

In addition to standard closing costs, VA loans include a unique charge known as the VA funding fee. This fee helps reduce the loan cost for U.S. taxpayers since the VA loan program doesn’t require down payments or private mortgage insurance (PMI). The fee ranges from 1.4% to 3.6% of the loan amount, depending on factors such as:

• First-Time Use vs. Subsequent Use: First-time users typically pay lower fees.
• Down Payment Amount: Larger down payments may reduce the funding fee.
• Type and Purpose of Loan: Refinancing and purchase loans have different fee structures.

Table 1: VA Funding Fee Structure

Note: Funding fees are subject to change based on current VA guidelines and should be verified at the time of application.

Reducing or Financing VA Loan Closing Costs

There are several strategies to manage or reduce the closing costs associated with a VA loan:

Seller Concessions

Sellers can pay up to 4% of the loan amount toward the veteran's closing costs and concessions, greatly reducing the financial burden on the buyer. These concessions can cover:

• Prepayment of property taxes and insurance.
• Payoff of credit card balances or judgments.
• Gifts such as a television or a new appliance.

Lender Credits

Borrowers may negotiate with lenders to receive credits, sometimes known as "lender-paid closing costs." While this can reduce upfront expenses, lenders usually increase the interest rate slightly in exchange for covering these costs.

Financing the VA Funding Fee

Borrowers have the option to roll the VA funding fee into the total loan amount, reducing the need to pay this cost upfront. However, this increases the loan balance and monthly payments.

Common Misconceptions and FAQs

Misconception 1: VA Loans Are Always Without Fees

While VA loans have numerous cost-saving benefits, they are not entirely fee-free. Borrowers must still account for allowable closing costs and the VA funding fee, though financing and strategies may help mitigate these costs.

FAQ: Can I Finance All Closing Costs with a VA Loan?

While it's possible to include the VA funding fee in the loan, most other closing costs must be paid out-of-pocket, negotiated with the seller, or covered by lender credits.

FAQ: Are VA Loan Rates Higher Because of Low Down Payments?

VA loan rates are competitively low due to the VA guarantee, often lower than conventional loans, despite typically requiring no down payment.

Conclusion

In conclusion, while closing costs are a necessary aspect of obtaining a VA loan, the benefits and allowances provided by the VA can significantly minimize their impact. By understanding the specific fees involved, leveraging seller concessions, using lender credits wisely, and possibly financing the VA funding fee, borrowers can effectively manage and reduce their closing costs. For those considering a VA loan, we recommend speaking with a knowledgeable lender to understand fully the options and strategies available to make the most of your benefits. Additionally, exploring related resources and articles on our website may yield further insights into the VA loan process and its many advantages.