Buying a home often comes with upfront costs, but how much cash you’ll need on hand can vary widely depending on the mortgage type, loan size and more. Some homebuyers will face higher upfront costs than others, so it’s important to be prepared and have enough funds saved when you find your dream home.
Buying a home is an exciting milestone, but it also involves navigating a lot of fees associated with closing on your mortgage. Veterans using their VA home loan benefit through Veterans United will encounter unique closing costs and rules. I want to demystify some of the confusion around VA loan closing costs, help you understand these charges, and outline some smart ways to reduce these expenses.
As a Veteran myself, I know how frustrating the homebuying process can be. My goal here is to explain VA closing costs in simple terms, so you know what to expect when purchasing a home with Veterans United.
What Exactly Are Closing Costs?
Closing costs refer to the various fees charged to finalize and close on a mortgage There are two main categories of closing costs on a VA loan
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Loan-related costs – These directly involve fees to originate and process the mortgage such as origination charges appraisal fees, and more.
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Prepaid costs – Expenses the borrower needs to pay in advance at closing like property taxes homeowners insurance, and interest.
Closing costs on a VA loan typically range from 3% to 5% of the total loan amount. So on a $300,000 mortgage, you can expect to pay $9,000 to $15,000 in closing costs.
The VA does limit some closing costs that lenders can charge and what fees the borrower is allowed to pay. We’ll break that down more below.
Key VA Loan Closing Costs to Know
While some closing costs are universal for any mortgage, here are a few that are specific to VA loans:
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VA funding fee – This is charged to help fund the VA loan program. For first time use, this fee is 2.3% of the total loan amount.
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VA appraisal – The VA requires an appraisal on all loans, and the fee typically ranges from $450 to $600 depending on the property location.
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1% origination cap – The VA limits origination charges to 1% of the loan amount. Lenders can charge this flat fee or itemize costs that total 1% or less.
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Non-allowables – Certain costs like pest inspections are not allowed to be charged to the Veteran if the lender uses the 1% flat origination fee.
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Termite inspection – This is required in certain regions and states. The Veteran can pay this fee, even with the 1% origination cap.
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4% seller concessions cap – The VA limits seller contributions towards the Veteran’s closing costs to 4% of the purchase price. The seller can cover any closing cost above this limit if they lower the home price.
So in addition to the unique VA fees, you will pay for title insurance, taxes, recording fees and other customary costs that come with any mortgage.
Can Closing Costs Be Reduced or Waived?
Absolutely! Here are some smart tips to minimize your closing costs on a VA loan with Veterans United:
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Negotiate with the seller – Ask them to cover some or all of your closing costs. This contributes to the 4% concessions limit.
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Shop around – Compare quotes from multiple lenders to find the best rate and lowest fees.
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Lower your rate – Pay discount points to get a lower rate and potentially lower your funding fee.
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Request a lender credit – Lenders can apply a credit to cover your closing costs.
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Ask about down payment assistance – Some programs specifically help with closing costs. Veterans United offers a closing cost loan option.
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Get exempt from the VA funding fee – Certain disabled Vets and other borrowers can avoid this fee.
When Will I Know My Final Closing Costs?
You’ll get an official closing cost estimate after the lender receives your full application, income details, credit report and property address.
Within three days, the lender must provide a Loan Estimate that breaks down all your estimated closing costs and loan terms. This helps you determine how much to negotiate with the home seller.
Closing costs can change slightly between the Loan Estimate and final disclosure. But there are legal limits to increases, so significant jumps are rare if you stick with the same lender and loan program.
Other Typical Fees on the Closing Disclosure
Aside from the VA-specific costs, here are some other common fees you’ll likely see on your final Closing Disclosure:
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Title insurance – Protects you and the lender against title defects. Figure 1% to 2% of the loan amount.
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Recording fees – Charged by local governments to record and process paperwork. Usually under $100.
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Homeowners insurance – Required for the first year. Depends on the property, but often $500 to $2,000.
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Property taxes – Varies widely by state and municipality. You’ll need to prepay a portion at closing.
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HOA fees – For properties in homeowner associations. Covers amenities and maintenance.
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Daily interest – Prepaid interest from your closing date to your first payment.
How Do I Pay Closing Costs on a VA Loan?
You cannot roll closing costs into the loan amount on a VA loan, with one exception. The funding fee is the only charge allowed to be financed into the loan.
For all other costs, you need to pay out of pocket. This can come from your own savings, gift funds, proceeds from a home sale, down payment assistance programs, or seller contributions.
If you don’t have cash on hand, talk to your lender about other products that can help cover closing costs, like a closing cost assistance loan. Veteran buyers may also want to consider a 0 down USDA loan which allows closing costs to be financed.
Tips for Reducing Your VA Loan Closing Costs
Here are my top 7 tips for minimizing closing costs with Veterans United:
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Get quotes from multiple lenders – Shop around for the best rates and lowest fees.
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Ask the seller to chip in – Perhaps even cover your VA funding fee. Just remember concessions count against the 4% cap.
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See if you qualify for down payment assistance – Nonprofit programs sometimes help with closing costs too.
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Lower your interest rate – Paying discount points upfront reduces your long term costs.
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Request a lender credit – Lender credits help lower your closing fees.
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Pay with gift funds – Get help from family members to cover costs.
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Check if you’re exempt from the VA funding fee – Purple Heart recipients and certain disabled Vets pay no fee.
Answers to Common VA Closing Cost Questions
Here are a few quick answers to some frequent questions on VA loan closing costs:
Can I finance closing costs into my VA loan?
No, the only fee you can roll into the loan is the VA funding fee. You need to pay other closing costs out of pocket or via seller concessions.
What are typical VA closing costs on a $300,000 loan?
Total closing costs on a VA loan for $300,000 typically range from $9,000 to $15,000. However, costs vary by lender, state, credit, and other factors.
Can the seller pay my VA funding fee?
Yes! The seller can cover the entire funding fee if they choose. Just remember it counts against their 4% closing cost concession limit.
What VA loan costs can’t be charged to the borrower?
If the lender uses a 1% flat origination fee, certain costs like pest inspections and underwriting fees cannot be charged to the Veteran buyer.
The Bottom Line on VA Loan Closing Costs
While closing costs may seem complicated at first, hopefully this article helped explain these charges in easy to understand language. The VA does limit some fees, but overall your closing costs will vary based on the lender, location, loan amount and other specifics of your transaction.
The best advice I can give is to get quotes from multiple lenders, negotiate with the seller, and ask your loan officer what options may be available to reduce your closing costs. Taking these steps can potentially save you thousands on your Veterans United VA loan!
What are the upfront costs of a home?
Upfront costs are expenses the homebuyer pays out of pocket once the seller accepts a home offer. These costs vary with each home loan type but typically include the down payment, earnest money and home inspection fee.
Upfront Costs of Buying a Home
Let’s take a closer look at five major expenses you may encounter when purchasing a home:
A down payment is one of the most common upfront costs when buying a home. Typically, this amount ranges anywhere from 3% to 20% of the loan amount, depending on mortgage type and other factors.
USDA and VA loans don’t require a down payment, which is a tremendous benefit and can help homebuyers save thousands of dollars on upfront costs.
Conventional loans typically require a down payment of at least 5 percent, although some lenders may go as low as 3 percent. For FHA loans, the minimum down payment is 3.5 percent.
On a $200,000 mortgage, that’s $10,000 for the traditional conventional down payment and $7,000 for an FHA down payment. Needless to say, it can take prospective homebuyers years to save that kind of cash.
Buyers may be able to use gift funds or down payment assistance programs to help secure home financing, but policies vary depending on the loan type, the lender and more.
Borrowers will often need to include a “good faith” deposit when they make a purchase offer on a home. This deposit, known as earnest money, signifies you’re a serious buyer. There’s no hard-and-fast rule for how much you need, but a general rule of thumb is 1% to 2% of the purchase price.
Buyers can typically get this money back if the deal falls through, or it’s often applied to a down payment or closing costs. VA buyers often put this money toward closing costs – or get it back in full – due to the program’s $0 down benefit.
VA Loan Closing Costs, Unallowable Fees and Seller Concessions
FAQ
Do veterans pay closing costs on VA loans?
What is the origination fee for Veterans United?
Does Veterans United require a down payment?