Who Pays Closing Costs on a VA Loan? A Complete Breakdown

If you’re a veteran or active-duty servicemember considering a VA home loan, you’re likely wondering – who pays closing costs on a VA loan? The answer is not always straightforward, as the VA has specific rules around which fees the buyer can and cannot pay.

In this comprehensive guide, we’ll break down exactly who is responsible for covering the various closing costs on a VA mortgage.

Overview of VA Loan Closing Costs

First what exactly are closing costs? Closing costs refer to the various fees and expenses required to finalize a mortgage transaction.

Some common closing costs on a VA loan include:

• Origination fee
• Appraisal fee
• Credit report fee
• VA funding fee
• Title insurance
• Recording fees
• Taxes and insurance

Closing costs typically range from 3-5% of the total loan amount So on a $200,000 VA loan, you can expect to pay $6,000-$10,000 in closing costs

Who Pays Closing Costs on a VA Mortgage?

The borrower is primarily responsible for paying closing costs on a VA loan. However, the VA does limit certain fees that the lender can charge the buyer.

The VA also allows the seller to pay closing costs on the buyer’s behalf, up to 4% of the total loan amount. This is known as “seller concessions.”

So in reality, closing costs are often split between the buyer and seller through negotiation. Let’s take a closer look at who pays what.

Buyer-Paid Closing Costs

Here are some common closing costs that the buyer typically pays on a VA loan:

• VA funding fee – This fee helps the VA operate the loan program. It ranges from 1.4-3.6% of the loan amount depending on your down payment and other factors. First-time buyers often pay 2.3%.

• Loan origination fee – The lender’s charge for processing the loan, capped at 1% of the loan amount by the VA.

• Appraisal fee – Cost of the required VA appraisal, typically $500-$1,200.

• Credit report fee – Usually around $50 to the lender for your credit report.

• Title insurance fees – For lender and owner policies to protect against title defects.

• Recording fees – To record the deed and loan documents, often $50-$150.

• Taxes and insurance – Prorated amounts due at closing for property taxes and homeowners insurance.

While the buyer traditionally covers these costs, the seller may agree to pitch in on some of them through concessions during negotiation.

Seller-Paid Closing Costs

The VA allows sellers to pay closing costs on the buyer’s behalf through seller concessions. However, there are limits:

• Seller concessions are capped at 4% of the total loan amount.

• The seller cannot pay for defects identified in the VA appraisal or required repairs.

• The seller cannot pay for termite inspections or treatment.

Sellers may agree to cover costs like:

• VA funding fee – Perhaps the most common VA closing cost concession.

• Discount points – To buy down the interest rate.

• Origination fee – Part or all of the 1% lender origination fee.

• Title fees – Splitting title insurance costs with the buyer.

• Prepaid taxes – Prorated property taxes due at closing.

• HOA fees – If the property is in a homeowners association.

Asking the seller to cover some closing costs helps reduce the out-of-pocket expenses for the VA buyer at closing.

Key VA Rules Around Closing Costs

Beyond who pays what, the VA places other limits around closing costs:

• The 1% origination fee cap if the lender doesn’t itemize fees.

• Sellers paying no more than 4% of the loan amount in concessions.

• Buyers not paying for certain “unallowable” fees.

• Sellers not paying for defects found in the VA appraisal.

These rules help protect the veteran or servicemember when using their VA home loan benefit. Breaking them could make your VA loan ineligible for guaranteed approval.

Tips for Paying Closing Costs

Here are some tips as you navigate paying closing costs on a VA loan:

• Get a detailed Loan Estimate early to understand all estimated fees.

• Be prepared to pay the VA funding fee; ask the seller to cover it if possible.

• Shop around with multiple lenders to compare origination fees.

• Calculate 4% of the loan amount to know the max concessions to request.

• Ask sellers to cover as many fees as possible within their limit.

• Reduce fees by paying discount points upfront or splitting title insurance.

• Raise your offer price if needed to incentivize sellers to contribute more.

• Be ready to cover 3-5% of the loan amount in closing costs.

• Save enough in your down payment and closing cost funds to cover your share.

Understanding the typical closing costs on a VA loan will help you create a comprehensive budget and offer strategy to minimize your out-of-pocket expenditure.

Can the VA Buyer Pay for Appraisal and Inspection Costs?

The VA has strict rules prohibiting buyers from paying certain closing costs to prevent them from shouldering the lender’s overhead costs. Buyers cannot pay for things like the lender’s processing fees, overhead, or even copy fees in most cases.

However, the VA does allow buyers to pay for costs related to protecting their interest in the home, such as:

• VA appraisal fees
• Termite inspection fees (where required)
• Well and septic inspection fees (when applicable)

So while you cannot pay lender fees, you can cover the costs related to appraising and inspecting the property you aim to purchase.

Key Steps to Minimizing VA Closing Costs

As the buyer, follow these tips to reduce your closing costs:

• Shop lenders to compare origination fees – Ask sellers to cover this
• Compare title rates to lower title insurance costs
• Split closing costs with the seller within their 4% limit
• Buy discount points only if break-even period works for you
• Lower interest rate less discount points needed to buy down
• Pay VA funding fee in cash rather than financing to save on interest
• Refi later to drop PMI, VA funding fee, and interest rate after repairs

While buyers pay most closing costs, you have options to reduce your total outlay through smart negotiating strategies and loan decisions.

Are Closing Costs Negotiable on a VA Loan?

Absolutely – VA closing costs are highly negotiable, particularly when it comes to what the seller pays.

You can negotiate with the seller to cover some or all of your closing costs, up to the 4% concession limit. Be sure to make your request early on rather than at the last minute.

Some strategies for negotiating VA closing costs:

• Note sellers often pay closing costs on conventional offers
• Request common concessions like VA funding fee and origination costs
• Offer a higher purchase price in exchange for closing cost assistance
• Send documentation to justify request for closing costs
• Get preapproved so you know actual closing cost amounts
• Be willing to cover costs if appraisal comes in low

Negotiating seller-paid closing costs takes finesse, market savvy, and strategic thinking. But it can potentially save you thousands, making it well worth the effort.

Alternatives to Paying Closing Costs for VA Buyers

If you’re struggling to cover closing costs, here are some alternative options to pay the VA funding fee, origination charges, and other fees:

• Lender credit – Ask your lender for a lender credit to offset costs
• Seller credit – Request sellers pay closing costs within 4% limit
• VA grants – Look into state VA homebuying grants and funding
• Closing cost assistance – Some lenders offer closing cost assistance programs
• Lower rate/costs – Take a slightly higher rate in return for lower fees
• Family gift – Receive gift funds from a family member to cover costs
• Savings – Use your own savings if possible rather than financing fees

Look at all possible options to avoid financing closing costs into your VA loan amount if feasible. This helps reduce the amount you pay in interest over the life of the loan.

When Are Final VA Closing Costs Determined?

You’ll get preliminary estimates upfront from lenders, but final closing costs are not locked in until just before closing:

• Loan Estimate – Early estimate provided within 3 days of application
• Closing Disclosure – Final details provided 3+ days before closing
• Closing statement – Final costs owed provided at closing table

Be sure to communicate any changes between the Loan Estimate, Closing Disclosure, and closing statement to ensure you aren’t overpaying.

The bottom line is that closing costs are negotiable up until you sign the final VA loan documents. Stay engaged with your lender for the best deal.

Work With a VA Loan Expert

Navigating who pays what closing costs on a VA loan can get confusing fast. Many homebuyers make the mistake of glossing over the details and end up overpaying.

To ensure you minimize your out-of-pocket costs, work with an experienced VA loan officer. They can walk you through the specifics of your situation and strategize ways to reduce your closing costs through negotiations, lender adjustments, and more.

A loan officer can also help you understand what is and isn’t allowed when it comes to closing costs on a VA loan. This prevents situations that could jeopardize your VA approval down the line. If VA closing costs have you concerned, consult a professional.