Who Pays Closing Costs on a VA Loan? How Seller Concessions Work

Buying a home is an exciting time, but it also comes with many fees and expenses. As a VA loan borrower, you may be wondering who is responsible for covering closing costs. The good news is that with a VA loan, you have more flexibility in negotiating with the seller to pay some or all of your closing costs. In this article, we’ll break down exactly how seller concessions work with a VA home loan.

What are Closing Costs on a VA Loan?

Closing costs refer to the fees charged to finalize and close on a mortgage These costs are in addition to your down payment amount, Closing costs on a VA loan can total 3-5% of your loan amount Here are some of the common closing costs with a VA home loan

• Origination Fee – This covers lender fees for processing your loan. VA guidelines limit this to 1% of the total loan amount

• VA Funding Fee – The funding fee helps the VA cover overhead costs. It ranges from 1.4-3.6% depending on your down payment and other factors.

• Appraisal Fee – The VA requires an appraisal on the property, typically $400-$1,200.

• Credit Report Fee – Most lenders charge for pulling your credit report, around $50.

• Title Insurance – This protects against issues with the legal title. Costs vary by state.

• Recording Fees – To file your deed and loan documents with local authorities.

• Daily Interest – Prepaid interest for the time between closing and your first payment.

• Taxes and Insurance – A portion of your property taxes and homeowners insurance premium.

As you can see, closing costs quickly add up. So who pays these fees on a VA loan?

Who Covers Closing Costs on a VA Loan?

With a VA loan, the borrower is typically responsible for paying closing costs. However, the VA does allow flexibility for the seller to cover some or all of these expenses through what are called seller concessions.

The key benefit of a VA loan is that there are no caps on how much sellers can contribute toward your closing costs. They can potentially cover 100% of your closing costs if negotiated in your purchase agreement.

This gives VA buyers strong negotiating power compared to other loan types like FHA and conventional loans which limit seller contributions.

Now let’s dive into how seller concessions work with a VA home loan.

What are VA Loan Seller Concessions?

Seller concessions refer to the closing costs and prepaid items that the home seller agrees to pay for on the buyer’s behalf.

Some examples of common seller concessions include:

• VA funding fee
• Appraisal fee
• Origination or lender fees
• Title insurance premiums
• Prepaid taxes and insurance
• Homeowners association (HOA) fees
• Home warranty plan
• Discount points to lower interest rate

Essentially, the seller can agree to cover any reasonable closing costs in the purchase contract. The key is staying within VA guidelines, which we’ll explain next.

VA Loan Seller Concession Limits and Guidelines

While VA loans don’t limit seller contributions toward closing costs, the VA does restrict seller concessions to 4% of the purchase price.

What’s the difference?

Closing costs refer to lender fees and third-party charges to close on the mortgage. Seller concessions mean any contributions outside of what the seller is required to pay.

Here are the key guidelines around seller concessions with a VA loan:

• Seller concessions capped at 4% of the sales price
• Seller must pay their own title insurance policy
• Seller must pay transfer taxes and recording fees
• Broker commissions and real estate fees are exempt from the cap

As an example, if you purchase a $300,000 home, the seller could provide up to $12,000 in concessions (4% of sales price) outside of their own required costs.

Exceeding this limit can cause your loan to be denied. So it’s important to understand what costs do and do not count toward seller concessions.

What Doesn’t Count Toward the VA Seller Concession Limit?

The 4% seller concession limit only applies to costs the seller voluntarily pays that they are not otherwise required to cover. Here are some fees that don’t count toward the limit:

• Title insurance premiums for the seller’s policy
• Transfer taxes
• Recording fees to file the deed and loan documents
• Real estate commissions for agents
• HOA fees owed by the seller
• Termite inspection fees (unless it’s a refinance)
• Loan discount points the seller pays toward interest rate reductions

As you can see, sellers have lots of flexibility to help VA buyers offset their closing costs without running into the concession limit.

How Do You Ask for Seller-Paid Closing Costs?

Now that you understand how seller concessions work, how do you go about negotiating them? Here are some tips:

• Get preapproved – This shows sellers you’re serious and know your budget.

• Check comps – See what sellers are paying in concessions on other sales.

• Know your costs – Add up all fees on your Loan Estimate to determine your request.

• Make the ask early – Include a request for seller concessions in your initial offer.

• Be reasonable – Seller concessions still require negotiation. Don’t demand the full 4% if you don’t need it.

• Get it in writing – Make sure contributions are clearly outlined in the purchase agreement.

• Communicate with your lender – Keep your loan officer in the loop to ensure no VA guideline violations.

While there’s no guarantee a seller will agree to pay closing costs, VA buyers have more flexibility to make this request thanks to the VA’s flexible guidelines.

Other Ways to Get Help with Closing Costs

If the seller won’t budge on closing costs, you still have a few options to lower your out-of-pocket costs:

• Shop lenders – Compare Loan Estimates to find lower third-party fees.

• Split costs – Offer to split closing costs with the seller.

• Lender credits – Some lenders will provide a credit toward fees.

• Grants or loans – Look into down payment assistance programs if you qualify.

• Lower the purchase price – Ask the seller to lower the price by your closing costs amount.

• VA loans – Consider a VA Interest Rate Reduction Loan (IRRRL) which has lower costs.

While seller concessions provide great flexibility, work with your agent and lender to explore all avenues to reduce costs.

Key Takeaways on Seller-Paid Closing Costs

• Sellers can pay 100% of VA loan closing costs through negotiation
• The VA limits seller concessions to 4% of the purchase price
• Required seller costs don’t count toward the 4% concession limit
• Make your request for concessions early in the negotiation
• Shop lenders and explore other cost offsets if sellers won’t pay

Understanding how to leverage seller concessions is key to keeping your out-of-pocket costs low with a VA loan. A savvy buyer can use this VA benefit to maximize savings and make the dream of homeownership more affordable.

Frequency of Entities

va loan: 20
closing costs: 16
seller concessions: 11
va guidelines: 3
va buyers: 3
loan amount: 2
VA funding fee: 2
lender fees: 2
loan officer: 1
purchase agreement: 1
Loan Estimate: 1