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.
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
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.
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:
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.
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.
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.
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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A few misunderstandings about VA loan closing costs can lead to confusion when planning a home purchase. Here are the most common.
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.
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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