The VA home loan is favorable among military homebuyers because there's no down payment requirement, and it offers competitive interest rates. But just like their civilian counterparts, those using the VA to finance must factor in closing costs.
But what do VA loan closing costs look like? Here's everything you need to know, plus some tips for reducing expenses.
What Are VA Loan Closing Costs?
Closing costs are the expenses over and above the property's price that buyers and sellers incur to complete a real estate transaction. These costs may include loan origination fees, discount points, appraisal fees, title searches, title insurance, surveys, taxes, deed recording fees, and credit report charges. By law, lenders are required to provide buyers with a closing disclosure three business days before a scheduled closing, or settlement, date. – Investopedia
How do VA loans differ from conventional loans?
Unlike conventional loans, the VA doesn’t require private mortgage insurance (PMI), which lowers monthly costs. However, a VA loan includes a one-time VA funding fee. It also caps origination fees at 1%, limits certain “non-allowable” fees, and allows up to 4% in seller concessions, making VA loans generally more affordable upfront.
These differences often make closing costs for VA loans less than those of conventional loans, yet another benefit for military home buyers using this type of financing.
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Breakdown of VA Loan Closing Costs: What’s Included
While some fees are unique to VA loans, others are standard to the industry. Here’s a look at the fees bundled within closing costs:
- VA Funding Fee: A one-time fee that helps sustain the VA loan program. The down payment amount, military service type, and whether it’s the first use of benefits determines the amount. It’s usually about 1.4% to 3.6% of the loan.
- Origination Fee: An administrative fee the lender charges to process the loan. However, the VA caps it at 1% of the loan amount to keep costs manageable.
- Appraisal Fee: Covers the cost of a mandated appraisal to assess the property’s market value and ensure it meets minimum property standards. It typically ranges from $400 to $600.
- Title Fees and Insurance: Includes fees for verifying property ownership and provides insurance to protect against potential title disputes. The cost ranges between $500 and $1,500 in total.
- Credit Report Fee: A $30 to $50 fee to cover the lender’s cost for pulling the borrower’s credit history.
- Recording Fees: Charges from the local government for officially recording the new property ownership in public records and often fall between $50 and $150.
- Discount Points (Optional): An optional upfront fee borrowers can pay to reduce the interest rate and potentially lower monthly payments over the life of the loan. The ratio is usually 1% of the loan amount per point. One discount point usually lowers the interest rate by about 0.25%.
Who Pays VA Loan Closing Costs?
Closing costs don't always fall solely on the borrower. Depending on the negotiation with the seller and the options provided by the lender, different parties can cover various costs, making it possible to reduce out-of-pocket expenses.
Borrower’s Responsibilities
Generally, borrowers are responsible for paying most of the standard closing costs, including the funding fee, title fees, appraisal fees, and recording fees. While some expenses can be financed or excluded, (like the funding fee), most other fees are paid upfront at closing.
Seller’s Responsibilities
Sellers can agree to cover some or all of the buyer’s closing costs, referred to as "seller concessions." As stated, the VA allows up to 4% of the loan amount in seller concessions. This amount can apply to costs such as the funding fee, prepaid taxes, and insurance, or even paying down the borrower’s debt. However, they are negotiable and depend on market conditions. In a buyer’s market, a seller may be more motivated to cover these costs to make their property more attractive.
Lender-Paid Costs
Lenders may offer credits to offset some of the borrower’s closing costs, especially in cases where the borrower prefers to reduce upfront expenses. They allow borrowers to offset part of their closing costs in exchange for a slightly higher interest rate. While lender credits reduce upfront expenses, they can raise the long-term cost of the loan.
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Common Misunderstandings About VA Loan Closing Costs
A few misunderstandings about VA loan closing costs can lead to confusion when planning a home purchase. Here are the most common.
Myth 1: “VA loans have no closing costs.”
Some people assume VA loans are entirely cost-free, but that’s false. While they reduce or cap some fees, borrowers are still responsible for closing costs.Myth 2: “The VA covers all closing fees.”
Although the VA limits some expenses and removes the funding fee for veterans with service-related disability, they don't cover all costs for the borrower.
Myth 3: “All VA loan fees can be financed.”
Borrowers can usually finance the funding fee. However, most other closing costs, like the appraisal and title fees, must be paid upfront.Although VA loan closing costs tend to be less than those of conventinoal loans, they do require financial planning. If you're concerned about the upfront costs, be tactical. Consider negotiating seller concessions and lender credits, but understand the long-term effects they have on financing. Exploring potential funding fee exemptions can also take the edge off the burden.
With the right preparation and working closely with a VA-approved lender, veterans and service members can enjoy a smoother, more affordable path to homeownership.
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