Every mortgage comes with closing costs (even those advertised as “no closing cost” loans). A home loan is a product, and like any kind of good or service, there are related costs.
So, what exactly is included in “closing costs” for a VA loan? As it turns out, “closing costs” is really a catchall term for any cost or fee required to finalize your mortgage. Some closing costs represent underwriting and processing fees, while others involve third-party expenses like homeowners insurance and property taxes.
Closing costs are the fees and charges that buyers pay when finalizing a mortgage loan. While the VA home loan offers many benefits for eligible servicemembers, the Department of Veterans Affairs does not cover all closing costs. This article will explain what closing costs are, how much VA borrowers can expect to pay, and whether sellers can help Veterans pay these expenses.
What Are Closing Costs?
When you finalize a mortgage, both the borrower and the lender have to pay certain fees and charges associated with the transaction. The total costs paid to close the loan are called closing costs.
Typical closing costs for any mortgage include
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Origination charges – Application fees, underwriting fees, etc. charged by the lender to originate the loan.
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Appraisal fees – For the appraisal report required by the lender.
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Credit report fees – For the credit check required by the lender.
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Title fees – For title insurance, which protects the lender from claims against the property.
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Recording fees – To record the deed and mortgage with local authorities.
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Prepaid interest – Interest for the first partial month before regular payments begin.
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Property taxes – Prorated taxes due at closing.
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Homeowners insurance – The first year premium required by the lender.
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VA funding fee – A fee specific to VA loans that helps fund the loan program.
These represent the standard closing costs for most mortgages. However, VA loans have some unique rules and requirements when it comes to fees and charges.
How Much Are VA Loan Closing Costs?
While closing costs vary by location, VA borrowers can expect to pay 1% to 6% of the mortgage amount in total closing costs. However, there are some VA rules that help limit fees:
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The VA limits origination fees to 1% of the loan amount. Lenders cannot charge higher application or underwriting fees.
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The VA caps the allowable closing costs that the Veteran can pay when the lender charges the full 1% origination fee.
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The mandatory VA funding fee ranges from 0.5% to 3.6% of the loan amount depending on factors like down payment and military service.
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VA appraisal fees follow VA requirements and cannot exceed certain maximums based on the appraised value.
So while total closing costs are still 1% to 6% of the loan amount, VA borrowers have some protection from excessive fees. Sellers can also help the Veteran pay many of the closing costs.
Can the Seller Pay VA Closing Costs?
While the buyer is responsible for paying closing costs on a VA loan, the seller can agree to cover some of these fees. This is known as seller concessions.
According to VA guidelines, the seller can pay:
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Up to 4% of the purchase price toward any closing costs
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The entire funding fee
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100% of discount points
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Normal prepaid expenses like property taxes, homeowners insurance, HOA fees, etc.
So on a $300,000 home purchase, the seller could theoretically contribute up to $12,000 toward closing costs and prepaids as concessions.
As part of the purchase offer negotiation, the buyer can request that the seller pays a certain amount toward closing costs. This reduces the out-of-pocket costs that the Veteran has to pay at closing. Many buyers specifically ask the seller to cover the VA funding fee, which can be over $6,000 on a larger loan.
It is important to note that seller concessions that exceed 4% of the purchase price must be subtracted dollar-for-dollar from the home’s fair market value before applying the VA county loan limits. So concessions over 4% may reduce the maximum loan amount you can qualify for.
Does the VA Cover Any Closing Costs?
While the VA does not directly cover closing costs, the program does have some features that help reduce fees for eligible borrowers:
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No monthly mortgage insurance – VA loans do not require monthly mortgage insurance payments like conventional loans, saving borrowers an average of $100 per month.
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No down payment required – The VA does not require any down payment, helping borrowers avoid having to save up thousands of dollars to close.
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Relaxed credit guidelines – VA underwriting is more lenient on credit scores and overall credit history compared to conventional loans. This helps more Veterans qualify and avoid high interest rates or extra fees due to credit.
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Seller concessions allowed – As mentioned above, the VA allows sellers to pay closing costs unlike some other loan programs.
So in essence, the structure and rules of the VA loan program indirectly help Veterans pay closing costs. But the VA does not directly cover or reduce any specific closing fees on your loan. All charges must be paid by either the buyer or seller at closing per VA guidelines.
Tips for Lowering VA Closing Costs
If you want to minimize your out-of-pocket costs on a VA loan, consider these tips:
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Shop lenders – Compare quotes from multiple lenders as origination fees, credit report fees, and other charges can vary.
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Look for lender credits – Some lenders offer a lender credit based on factors like your credit score or using their preferred title company.
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Ask the seller to pay – Negotiate with the seller to cover as much of the 4% concessions limit as possible.
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Pay discount points – While this increases your upfront costs, paying points to lower your interest rate can save substantially over the life of the loan.
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Lower the loan amount – The higher the loan amount, the higher your origination fees, funding fee, prepaids, etc. Putting down 5% or more if possible lowers the loan amount and closing costs.
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Get preapproved – Being preapproved makes your offer stronger and gives you a Loan Estimate showing estimated closing costs early in the process.
While the VA does not directly cover closing costs, following VA guidelines and leveraging seller concessions can help eligible Veterans and servicemembers minimize out-of-pocket expenses when getting a VA mortgage.
Frequency of Entities
va loan: 25
closing costs: 23
seller: 7
veteran: 6
fees: 5
lender: 4
purchase price: 3
va guidelines: 3
down payment: 2
loan amount: 2
prepaids: 2
concessions: 2
negotiate: 1
offer: 1
loan estimate: 1
Can you roll closing costs into a VA loan?
The VA funding fee is the only closing cost that can be rolled into a VA loan. VA buyers can ask the seller to pay it, but doing so would count against the 4% concessions cap.
Another potential approach is to ask the seller to lower the home price by whatever the fee totals.
Well, Septic and Termite Inspection Fees
The VA requires borrowers to get termite inspections depending on where you live in the country. If the appraised property has a private well and septic system, the VA requires a water and well test.
VA buyers are allowed to pay the termite inspection fee when a termite inspection is required. The VA also allows buyers to pay for any repairs stemming from well or septic issues.
VA buyers are also subject to the VA Funding Fee, a mandatory charge that goes straight to the Department of Veterans Affairs to help keep the program running. Your funding fee amount will vary depending on what branch you served, whether or not you are making a down payment, and if its your first or subsequent time using the loan. For most first-time VA buyers, this fee is 2.15% of the loan amount, provided you’re not making a down payment. Buyers who receive VA disability compensation are exempt from paying this fee.
Another option is the seller may agree to pay your VA Funding Fee as a concession rather than have you add it to your loan amount.
Can You Roll in Closing Costs with a VA Loan?
FAQ
Can closing cost be included in VA loan?
Who pays closing costs in VA?
What does a VA loan cover?
What are VA closing costs?
Mortgage closing costs roll many fees into one. When it comes to VA loans, your closing costs can include: While VA closing costs include a range of fees similar to other loans, the VA funding fee is specific to VA home loans. It’s a fee that covers the possibility of the loan not getting repaid—ranging from 1.4% to 3.6%.
Do Va borrowers have to pay closing costs?
However, VA borrowers will have to pay closing costs, including the VA funding fee. VA closing costs can be anywhere from 1 to 5 percent of the total loan amount, depending on the cost of the home. VA closing costs can be paid out-of-pocket, covered by seller concessions and lender credits, or financed into the total loan amount.
Can a closing cost be rolled into a VA loan?
The VA funding fee is the only closing cost that can be rolled into a VA loan. VA buyers can ask the seller to pay it, but doing so would count against the 4% concessions cap. Another potential approach is to ask the seller to lower the home price by whatever the fee totals. When will I know my final closing costs?
How do I pay for my VA Loan Closing costs?
The different ways you can pay for your VA loan closing costs include: Pay the closing costs out-of-pocket and in full at closing. Ask the home seller to pay for the closing costs. The seller can agree to pay a portion of the buyer’s closing costs, up to 4 percent of the mortgage, including the funding fee or origination fee.