Last Updated on February 8, 2023 by Bob Filipczak
VA loan closing costs are a little different than average closing costs using a conventional mortgage because there are rules about what VA borrowers can and can’t pay. Consequently, the VA closing costs are not as straightforward as you might imagine, and you’re going to need some skilled negotiators on your side to complete the process. Fortunately, Homes for Heroes can provide you with a team of negotiators to help you work through your VA loan closing day.
When you compare the size of your new home mortgage to the closing costs, they seem like incidentals and not really that significant. However, they can sneak up on you. The process of making it to the final closing involves a lot of steps, so when you finally get there, you figure you made it. Closing costs can be a surprise, which is why mortgage brokers and loan officers are pretty vigilant about communicating the specifics of closing costs early and often.
“Beware of little expenses. A small leak will sink a great ship.” –Benjamin Franklin
A VA loan, in a nutshell, is a benefit for veterans and active duty military personnel to help them buy homes. The list of benefits from a VA mortgage is long, but the outstanding advantages are: no down payment, a lower interest rate and no private mortgage insurance. That’s a powerful combination of money saving benefits.
In exchange for the multitude of perks provided by the VA loan system, you need to abide by their rules, which can affect your closing costs. Let’s start first with the closing costs you will pay with your VA loan.
VA Closing Costs: What You Can Pay
The VA home loan system saves you a lot of money, but you will still need to pay closing fees. Here are some of the common ones you will probably encounter at closing.
Loan Origination Fees
Loan origination fees are a group of fees that pay for the processing of the VA loan. Because the loan amount is big, so too is the process. The VA limits your lender to a 1% flat rate on these charges, so if you are getting a $350,000 mortgage, the most you can pay in origination is $3,500. The percentage can differ from lender to lender.
This collection of fees can get a little tricky. There is an explicit list of fees the lender can’t charge you (for example, notary fee, title fees, escrow fees), but if they roll these fees into the 1% Flat Fee, then it’s Ok. This might require a bit of back-and-forth with your loan officer.
Also known as title insurance, the title search fee covers the cost of researching the title. Someone is going to look into the history of your property to make sure there aren’t any liens or legal entanglements that will prevent the sale of the property to you.
Credit Report Fee
Lenders may charge you a credit report fee to attain your credit score report, but the VA rules say they can’t charge more than $50.
Certain Inspection Fees
Depending on the property, you may need inspection of the well and the septic system. In addition, a termite inspection may also be required by the lender. The VA will not allow termite inspection fees, but they are typically paid by the seller.
VA Funding Fee
Every VA loan includes a one-time VA funding fee – there are no other VA loan fees – and it can range between 2.6 percent and 3.5 percent of the loan amount (depending on whether it’s your first VA loan or not). This is due at closing. If you were injured or disabled as a result of your service in the military, you probably don’t need to pay this fee. Likewise, if you received a Purple heart, this fee is waived.
The discount fee can reduce your overall monthly payment for the mortgage and the VA allows this. This is a way for you to pay additional money to “buy down” the interest rate on your loan.
If you are getting a construction loan for a new build, improvements, renovations or repairs to the property, the lender can charge you an additional 2% flat fee as long as the lender supervises the construction.
On Closing Day: What You Can’t Pay
Attorney’s fees – You aren’t allowed to pay any attorney fees, but you can pay for title work and title insurance.
Real estate commissions – Your real estate agent gets a commission if he or she sells you a house. Typically that commission is split by the buyer and the seller, but VA restrictions won’t allow you, as the buyer, to pay any of that. This is one of the factors that will be discussed in the “Concessions” section below.
Prepayment penalties – If there are liens on the property (revealed by the title search) there may be penalties that need to be paid before the house is clear to buy. If you have a VA Loan or refinance, they won’t allow you, the buyer, to pay these.
HUD Inspection fees – If the property was constructed by the Department of Housing and Urban Development, any inspections or re-inspections must be paid by the builder. As a VA Loan holder, you cannot pay these inspection fees.
The full list describing the dos and don’ts associated with VA loans is available online from the Department of Veterans Affairs. It thoroughly answers the question “can closing costs be included in a VA loan?” If you want to dig into the specifics of these rules and exceptions, that document is a good place to start.
When you start looking at getting concessions from the buyer, you will need good negotiators on your side. The VA wants to protect veteran and active-duty service members from excessive closing costs, so they put restrictions on what you, as a VA loan holder, can pay. This can put you between a rock and a hard place when you are out hunting for, and making offers, homes you want to buy.
Normally in the real estate market, asking the seller for concessions has been standard. The last few years, however, haven’t been normal. It has been a seller’s market (to put it lightly) so asking for concessions may put your offer on a house at risk. If other home buyers are providing offers that ask for no closing costs from the seller, it’s going to be hard to win in a bidding war.
The traditional path to concessions when the VA is involved is to take the costs the buyer cannot pay, by law, and have the seller pay them. Then the buyer agrees to a larger mortgage loan to pay the seller back for those closing costs. For example, if the rules from the VA say you can’t pay the $7,000 in closing costs, and the purchase price is $300,000, then you take out a mortgage for $307,000 to cover the closing costs the seller has agreed to pay.
With a VA loan, you can’t get a loan for more than the appraised value of the property. That’s a limitation you and your mortgage lender will need to work with.
The 4% Rule – When asking for concessions from the seller on closing costs, understand their limits. Even if they agree to cover many of the costs that the VA will not let you pay, there is a cap to what the seller can pay. Sellers can’t pay more than 4% of the total cost of the loan in concessions, according to the VA Loan process.
Even though there are a lot of limitations on the closing side of the equation when dealing with the VA Home home buying process, there are two bright spots of good news.
One bright spot is the real estate market is settling down a bit. It’s still going to be a seller’s market for a while until inventories increase, but it probably won’t be as crazy as it has been in the past couple of years. That means that concessions from sellers may be back on the table as the housing market calms down. That may take some pressure off you, as the buyer, as you navigate the complexities of both the real estate market and the VA rules.
Homes for Heroes Saves You More on Closing Costs
The second bright spot is that we, at Home for Heroes, can help. When you sign up with Home for Heroes, we will connect you to our local real estate and mortgage specialist. Throughout the house hunting and buying process, these experts will help you during negotiations and closing. They are pros at dealing with VA home loan rules and they can help you attain your dream home. Then at the end of the closing, Homes for Heroes will give you a Hero Rewards check (average savings is $3,000) to honor your service to your country.