Do You Pay Closing Costs with a VA Loan?

The first step toward answering this question – Do I pay closing costs with a VA loan? – is understanding exactly what a VA loan is, and isn’t.

The Department of Veterans Affairs was consolidated from prior government efforts to care for veterans going all the way back to the Revolutionary War. It was World War II that required a comprehensive and well-funded government entity to handle the needs of the large number of veterans from that global event.

Along with health benefits, places for returning veterans and their families to live were a priority. The VA created a plan to assist veterans with the purchase of homes. That plan includes what we refer to as a “VA loan.”

What VA loans are not, generally speaking, are loans directly from the Department of Veterans Affairs. The loans, like most mortgages, come from banks and other private lenders. What the VA helps with is significant: the veteran does not have to put a down payment on a home; the VA provides appraisals on potential homes to ensure a fair price and a safe, clean environment; there is no need for private mortgage insurance,; and lower interest rates are available.

But the loan is still coming from a bank or other lender, and those lenders almost universally require closing costs. The VA doesn’t eliminate closing costs, but its rules do limit the closing costs banks can charge veterans.

What Are VA Loan Closing Costs?

Closing costs are often a shock to new home buyers. Lenders pile on the fees and commissions at the moment you are making the largest financial commitment of your life. The VA’s program does not remove all of those costs, but it does reduce them to a more manageable level.

Lenders charge an “origination fee,” which essentially covers the cost of the paperwork required for the sale. One of the benefits of VA loans is a limit on that fee. It can be no more than 1% of the total loan amount — $2,500 on a $250,000 loan, for example. The VA also prohibits the “lender’s fee” for a real estate attorney; settlement charges; prepayment penalties, and mortgage broker commissions.

Can Closing Costs Roll Into VA Loans?

Rolling closing costs into a mortgage –increasing the loan to cover the closing costs as well as the sale price – is one helpful strategy for new home buyers. With a VA mortgage, some but not all costs may be rolled into the loan.

The VA includes a “VA funding fee” in its loan process. This fee is determined by how much of a down payment you make. Since one of the benefits of a VA loan is the lack of a required down payment, this is a bit contradictory. If you put down 5% of the sale price as a down payment, you would still pay a 2.6% funding fee to the VA. The VA funding fee is funneled back to the VA, providing the money for future VA loans.

The VA funding fee may be rolled into the mortgage amount. But such costs as mortgage discount points, recording fees, state and local taxes, title insurance and a credit report are not rolled into the mortgage.

How Are Closing Costs Paid?

The most basic approach is simply to write a check and pay the costs at closing. Sounds easier than it often is. But there are other options.

1. When negotiating the sale, the buyer can ask the seller to pay some of the closing costs. The seller, after all, is receiving money in the transaction. Perhaps the seller had help with closing costs when buying the property in the first place. The seller’s incentive is to complete the sale as smoothly as possible.
2. Ask the lender for a no-closing option. Typically, the lender will drop closing costs in exchange for a higher interest rate on the loan. This can solve the short-term problem, but remember it means making higher mortgage payments for the life of the loan.
3. Get a gift from a close friend or family member. This, too, is easier said than done for most people. But the VA does allow such gifts, although a “gift letter” is required, as is documentation of the financial ability to provide the gift.

Who Pays Closing Costs on a VA Loan?

The buyer, the seller and the lender each pay closing costs at the moment the sale becomes final.

The seller pays the commissions for both the buyer’s and seller’s real estate agents, as well as any brokerage fee. Sometimes, the seller also pays for a termite inspection or well-water inspection. The seller would also pay any other closing costs they agree to pay after negotiation with the buyer.

The buyer is responsible for the VA funding fee, the loan origination fee, loan discount points, the VA appraisal fee, title insurance and more. The VA funding fee may be rolled into the loan itself. The buyer can negotiate with the seller and the lender to pay some of the other closing costs. The lender will typically pay attorney fees.

VA Loan Closing Costs Fees

Most closing costs are standard in any mortgage loan process. They include an origination fee, appraisal fee, discount points, and fees for a title search and paperwork for the title itself. A VA loan limits some fees, eliminates some, and adds its own: the VA funding fee.

Origination Fees

When you apply for a mortgage, your lender begins to work on the processing and underwriting of your loan. That work is done by the lender’s employees. Those costs are passed on to the applicant at closing. That is standard in any mortgage process.

The VA limits origination fees to 1% of the total loan amount. That is in line with the current market rate, but it does give a VA loan applicant some cost certainty.

VA Funding Fee

This fee is unique to VA loans and it does offset some of the advantages of a VA loan, such as the lack of a down payment and a limit on origination fees.

On the other hand, this fee is how the VA funds future loans. That means the loan you are getting was largely funded by the fees of prior borrowers.

The funding fee is affected by several factors. If you are making a down payment, the funding fee is lower. The larger the down payment, the lower the funding fee. If your down payment is 5% or less, the funding fee is 2.3% of the total loan. Put down 10% of the price and the funding fee drops to 1.4%

It also helps that the VA funding fee can be rolled into the mortgage, meaning you can add the amount to the total being borrowed.

There are situations in which the borrower is not required to pay a VA funding fee:

• Receiving, or eligible to receive, VA compensation for a service-related disability
• The surviving spouse of a veteran who died in service or from a service-related disability
• The recipient of the Purple Heart
• If you aren’t sure that you qualify for a VA funding fee waiver, talk to your mortgage lender. They can verify this with the VA.

VA Appraisal Fee

Appraisal fees are a part of any mortgage loan process. The lender must be sure the property is worth the amount of the loan. A professional appraiser inspects the home and sets a market value for it. This is also true for a VA loan. In addition, a VA appraiser makes sure the home is safe and in acceptable condition.

Expect to pay from $500 to $1,200 for a VA appraisal fee. This fee will be included in the closing costs.

Seller Concessions on VA Loans

You can negotiate to have the seller pay some of the closing costs. Why would a seller do that? Remember, the seller is moving out of the home for a reason and probably has a new home of their own to settle on. Once the mortgage has been approved at an amount acceptable to the seller, it is in the seller’s interest to complete the sale. Also, the seller is receiving the loan amount and is better positioned to pay closing costs than a buyer who may already be overextended.

The VA permits the seller to pay for closing costs up to 4% of the loan amount. Many of these fees benefit the seller as well as the buyer.

Title Charges

Before approving a mortgage, the lender must be sure the property is actually the seller’s to sell and isn’t burdened by liens or other legal problems. That means confirming the name on the title, which is typically filed with county or municipal governments. After a successful title search, the sale can go forward. The buyer’s name goes on a new title, which must be filed with the county.

After that, the new home owner should get title insurance in order to assure that information is protected and available for inspection.

Discount Points

While folding closing costs into your loan can raise your monthly payment, one way to lower it is to buy discount points. Basically, you pay the lender a percentage of the total loan amount up front. For each 1% of the loan, your interest rate drops one percentage point.

Discount points are available on VA loans as well as standard loans. They are generally payable at closing, so it’s important to calculate the risk/reward of paying more money up front.

How Are VA Closing Costs Different?

Remember, the VA does not lend money directly. A VA loan comes from a bank or other lender, but is regulated by the VA. Standard mortgages require closing costs. So do VA loans, although the VA limits some and eliminates others.

No Mortgage Insurance Requirement

In a typical mortgage, the borrower must pay for private mortgage insurance, which is meant to protect the lender should the borrower default on the loan. The VA does not require PMI, one of the ways the agency aids military members and veterans with the loan process.

There Are Non-Allowable Fees

The list of fees charged by lenders in a standard mortgage is almost ridiculously long. With a VA loan, the borrower is protected from some of the more extreme fees.

Non-Allowable Fees for VA Loan Closing Costs

The typical civilian first-time home buyer is hit with a long list of fees at closing. The VA already understands the process and protects military members and veterans by making some fees non-allowable:

• Attorney fees: Lenders often pass on attorney fees to the buyer. The VA does not permit that practice.
• Real estate agent commissions: Real estate agents generally represent the seller, and VA loans do not allow the buyer to pay their commissions.
• Prepayment penalties: Lenders include these to protect their investment from buyers who want to pay off a mortgage early. Early payoffs deprive the lender of significant interest payments. The VA prohibits these penalties.
• Inspection fees required by government agencies: The seller is responsible for getting required inspections before a sale. The VA does not allow those fees to be passed on to the buyer.
• Appraisal fees requested by someone other than the veteran: The VA appraises properties for buyers, making sure the property is worth the price being financed and is safe and clean enough for a veteran or military member to occupy.