VA Loan Fees: Non-Allowable Fees & Seller Concessions

One benefit of using a VA loan is that the Department of Veteran Affairs sets limits on what lenders can charge in fees and closing costs. There are even fees that VA borrowers are restricted from paying.

In this article, we’ll discuss VA loan fees with a focus on what VA non-allowable fees and seller concessions are and how they can help you save more when you’re closing on a home purchase.

Who pays closing costs on a VA loan?

Closing costs for VA loans are paid by a combination of the seller and buyer unlike other mortgage types where the buyer is typically responsible for all closing costs.

For a VA loan, the Department of Veteran Affairs (VA) sets guidelines to minimize the fees that buyers are responsible for, which are called “non-allowable fees.” The VA sets a cap of 4% of the established reasonable value of the property in fees or seller concessions. Certain costs are considered seller concessions when they’re paid by the seller. These seller concessions are included in the 4% rule. Though other costs may be paid by the seller, they may not necessarily be part of the 4% cap.

Certain closing costs can be negotiated between the buyer and the seller to determine who will pay, including:

• VA funding fee
• Loan origination fee
• Loan discount points or funds for temporary “buydowns”
• Credit report and payment of credit balance or judgments
• Hazard insurance and real estate taxes
• State and local taxes
• VA appraisal fee
• Title insurance
• Recording fee

Be sure to visit va.gov for the VA’s full explanation on the VA funding fee and loan closing costs.

VA non-allowable fees

Determining the full list of expenses a VA borrower can and cannot pay partly depends on how your mortgage lender structures the loan. However, lenders are prohibited from charging you certain fees at closing based on the list maintained by the VA. These are known as non-allowable fees. By excluding these fees, the VA is aiming to reduce the financial burden on veterans and military members when they choose to purchase or refinance a home.

The VA has also established a guideline known as the “one percent rule,” covering the maximum amount borrowers can be charged for certain non-allowable fees. In essence, it is a 1% fee that covers your lender’s costs associated with originating, processing, and underwriting the loan. When a lender charges the 1% fee, they can’t tack on additional charges that the VA considers overhead costs.

As a VA borrower, the one percent rule protects you from excessive fees to ensure the total cost of the loan remains affordable. If your lender charges the flat fee, the list of non-allowable fees you cannot be responsible for paying includes:

• Loan application or processing fees
• Lender inspections (except for VA construction loans)
• Broker or trustee fees
• Escrow or notary fees
• Interest rate lock-in fees
• Document preparation fees
• Lender appraisals
• Postage costs
• Tax service fees
• Loan closing or settlement fees

Here’s an example: If a veteran is taking out a $250,000 VA loan, the maximum amount they can be charged for at closing will be $2,500 (or 1% of $250,000). Fees that exceed the 1% fee limit must be paid by the lender or the seller.

VA seller concessions

Seller concessions are anything of value that’s added by the seller to a property transaction that the buyer is not responsible for paying. This allows a VA homebuyer to negotiate with the seller to have them pay costs associated with the loan on the buyer’s behalf. They do not include payment of the closing costs or discount points.

Seller concessions include, but are not limited to, the following:

• Origination fee
• Appraisal fee
• Attorney fees
• Gifts (such as kitchen appliances, furniture, home goods, etc …)
• Buyer’s VA funding fee
• Prepayment of buyer’s property insurance and taxes
• Extra points to secure interest rate buydowns
• Payoff of credit balances or judgments on behalf of the buyer
• Provision of escrowed funds for temporary interest rate buydowns

Note that seller concessions don’t include payment of the buyer’s closing costs, or payment of points.

Max VA seller concessions

While the VA’s policy on seller concessions is flexible, it requires that they do not exceed 4% of the established reasonable value of the property. For comparison, conventional loans usually allow sellers to pay 3% in concessions. However, FHA borrowers can ask that sellers pay up to 6%.

Sellers are not required to offer concessions, nor pay the homebuyer’s closing costs. VA seller concessions are negotiated between the parties involved in the sale of the home. While some sellers may be more likely than others to pay concessions in order to sell the property, it’s important to have a VA-savvy real estate agent on your side to help you through negotiations.