September 16, 2022
One of the most attractive benefits of Veterans Affairs (VA) loans is the ability for eligible service members to buy a home with lower upfront costs, including lower (or zero) down payment, no mortgage insurance requirement, and fewer closing costs. But one question remains: What do VA loan closing costs actually look like?
Read on to learn the answers to this and your other most common questions about VA loans and closing costs.
DO VA loans have closing costs?
The short answer is yes. Closing costs on VA loans are similar to those you’d find on conventional and FHA mortgages because many of the same activities occur: credit check, loan underwriting, title and record filings, appraisal, inspections, and more.
VA closing costs generally fit into one of two categories. These distinctions make a difference when we talk about concessions later.
Loan-related closing costs
These costs are directly related to your actual loan:
●Origination fee – Paid to your lender for various costs such as underwriting, origination, and processing
●VA funding fee – Supports the continuation of the VA home loan program
●VA appraisal fee – Covers the cost of a special appraiser that ensures your property meets the VA’s minimum property requirements
●Title insurance and fees – Protects you against liens or other title-related property issues at closing
●Discount points – Optional way to buy down your interest rate
●Inspection fees – For termite, well, septic, and roof inspections (if applicable)
Non-loan closing costs:
These costs are not directly related to your loan, but are still part of the homebuying process.
●Real estate agent commissions and brokerage fees – Covers services provided by real estate professionals assisting the buyer and seller
●Recording fees – Paid to state and local governments for recording your deed and other mortgage documents
●Insurance and taxes – Prepayment for your homeowners insurance and annual real estate taxes
A long list of fees due at closing can feel overwhelming. The good news: The VA protects borrowers from certain costs like escrow fees, lock-in rate fees, and application fees. They also make it possible to reduce upfront expenses and avoid some closing costs altogether.
What is the VA funding fee?
The VA funding fee is a cost unique to VA loans. Because VA loans are backed by the government, U.S. taxpayers provide the funding for them. This one-time payment makes it possible for the VA loan program to continue to offer special advantages such as no down payments or monthly mortgage insurance.
The amount of a funding fee varies based on your loan type, the total loan amount, whether it’s your first VA loan, and your down payment amount. It can range from 0.5 percent for a simple loan, like a VA refinance, and go up to 3.6 percent, which is more typical if it’s not your first VA loan. View the VA funding fee rate charts to estimate your payment.
Most people find the VA loan benefits outweigh the costs of a funding fee. Sometimes it can be negotiated for the seller to pay. You can even choose to roll it into the loan instead of paying the fee upfront with other closing costs. (If you take this route, ask your lender to run the numbers for you – the amount you may save not rolling it into your monthly payment may be worth the upfront sacrifice.)
Does this mean I can roll my other closing costs into a VA loan?
You can reduce the amount you’re responsible for paying at closing by rolling some of your closing costs into the loan. This can be helpful when you’re trying to keep upfront expenses to a minimum. Just remember that you’ll end up paying more overall because of interest that will be charged.
Unless you’re exempt, the VA funding fee will be your largest cost at closing. Fortunately, the entire fee can be financed within your loan and paid off as part of your monthly mortgage payments.
Not all closing costs can roll into the loan. However, it’s possible to build your closing costs into your offer and have the seller pay them at closing. We’ll explain this in more detail below.
Who pays VA loan closing costs?
A common question is this: “Who pays closing costs on a VA loan?” Typically, the seller and buyer each pay some of these expenses. In this table, you’ll see what a seller must pay for because the VA protects buyers from these costs.
More ways to save: seller concessions
It’s possible to reduce your closing costs by negotiating to have them paid by the seller. All loan-related closing costs can be paid by the seller if they accept your offer with those terms.
The VA also allows a seller to contribute up to 4 percent of the total home loan for other expenses, which could include non-loan closing costs. These are called concessions and are a way to receive assistance with upfront costs you’d like to avoid such as real estate taxes and homeowners insurance.
Concessions are part of a negotiation between the buyer and seller. It’s best to work with a real estate professional to guide you through the process successfully.
There are many factors that affect your VA loan costs. From the moment you’re ready to explore the idea of homeownership to closing on that perfect property, you’re not alone on this journey.
To learn more about PenFed loans or what loan is right for you:
● Call 844-486-1006
● Visit the Mortgage Center
● Visit Get My Rate