The Closing Costs of VA Home Loans
Closing on a home that you have purchased with a VA loan typically incurs an array of fees and expenses, regardless of what type of VA loan you have secured. However, VA buyers do benefit from the fact that there are stringent limits in place related to what they can legally be asked to pay.
When considering the permitted borrower charges, it is worth bearing in mind the fact that the seller can bear some expenses and/or may be negotiable during the purchase process. Under the VA, sellers can agree to fund all the veteran’s mortgage-related closing costs and a maximum of 4% in concessions, the latter of which can be used to fund prepaid expenses like insurance and property taxes. Veterans are advised to seek expert help from their real estate professional to manage the transaction costs and keep expenses to a minimum.
It is worth reviewing some of the expenses that you may encounter when securing a VA purchase loan against a property.
The lender is permitted to charge reasonable closing costs some or all of which may not be incorporated into the loan itself. The costs listed below may be met by the veteran who is buying the property, the person who is selling it, or may be distributed between the two. Closing costs can differ from lender to lender and state to state due to variations in the laws that are in place. However, they typically include:
- Credit report generation fees
- Discount points
- Loan origination fees (typically around 1% of the value of the loan)
- Recording fees
- Title search and title insurance
- State and/or local transfer taxes, where applicable,
- Survey costs
Lenders are not permitted to charge any commission, “buyer broker” or other brokerage fees to veteran buyers.
The VA has outlined a set of “Itemized Fees and Charges” that veterans can pay up to a maximum amount. In addition, the lender can charge a 1% flat charge as well as a reasonable amount of discount points. The VA has also established some special provisions related to improvement, alteration, construction, and repair loans.
APPRAISAL AD COMPLIANCE INSPECTIONS
The veteran will be responsible for paying the VA Appraiser fee and any compliance inspection fees. If the veteran requests the second appraisal following the initial valuation, he or she will also be required to pay those fees. However, if it is the seller or the lender that requests a second appraisal, the appraisal fees cannot be charged to the veteran.
The veteran can be charged any recording taxes and fees or any other expenses that are attendant to the loan recording process.
The veteran can be charged for the lender’s cost of obtaining a credit report.
The veteran can be charged for the portion of assessments, taxes, and similar items for the current year that are chargeable to him or her as a buyer and/or the initial deposit for the insurance and tax account.
The veteran can be charged for the hazard insurance premium. This will include flood insurance, where applicable.
FLOOD ZONE DETERMINATION
The veteran can be charged for the fees associated with verifying whether a property is located in a special flood hazard area.
The veteran can be charged for any survey fees where these are mandated by the lender.
TITLE EXAMINATION AND TITLE INSURANCE
Where applicable, the veteran can be charged for title examination and insurance. If the lender determines that there is a requirement for an environmental protection lien endorsement to a title policy, the veteran can be required to pay the costs associated with securing this endorsement.
Unless exempt from doing so, the veteran will be required to pay the VA a basic funding fee of 2.15%. If the veteran makes a down payment of 5% or above, this fee will be reduced to 1.5%. If the veteran makes a down payment of 10% or above, this fee will be reduced to 1.25%.
All qualifying National Guards or Reserves will be required to pay a funding fee of 2.40%. If they make a down payment of 5% or above, this fee will be reduced to 1.75%. If they make a down payment of 10% or above, this fee will be reduced to 1.5%.
It is worth noting that VA buyers are not required to use cash to pay the funding fee. Some opt to finance it into the loan.
Some veterans are exempt from the funding fee if they meet the following criteria:
- They are currently eligible for VA compensation due to service-connected disabilities.
- They would be eligible for VA compensation due to service-connected disabilities; however, they receive retirement pay in place of this compensation.
- The borrower is a surviving spouse of a veteran who died during service or died due to a service-related disability (regardless of whether the surviving spouses are veterans who have a loan entitlement of their own).
The VA reserves the right to determine who and who not is eligible for fee exemption.
The VA has identified a set of fees that veterans cannot be expected to pay. When such fees arise, the lender is required to cover them using the flat 1% fee charged to the veteran.
- Amortization schedules
- Attorneys services other than for title work
- Document preparation fees
- Escrow fees or charges
- Fees for preparation of truth-in-lending disclosure statement, fees charged by loan brokers, finders or other third parties, and
- Interest rate lock-in fees
- Loan application or processing fees
- Loan closing or settlement fees
- Notary fees
- Passbooks, and membership or entrance fees
- Postage and other mailing charges, stationery, telephone calls and other overhead
- Preparation and assignment of the mortgage to other secondary market purchasers
- Preparing loan papers or conveyance fees
- Tax service fees
- Trustee’s fees or charges
COVERING CLOSING COSTS
Veterans often mistakenly believe that the VA mortgage covers all closing costs. This is not actually the case. However, it is possible to cover your closing costs by structuring the real estate contract in a strategic way. The amount that is loaned to you will be the value of the property per the appraisal or the amount that you paid for it, whichever is lower. As such, if you want to incorporate your closing costs into the loan itself, you could try to increase the price of the property and include a clause that specifies that the seller will be responsible for the closing costs and any pre-paid expenses equivalent to the price increase. Provided that the value of the appraisal covers the increased price, you can use this approach to fold the closing costs into the loan. However, if you opt to do so, it is important to note that this will mean you are financing the closing costs over the full loan duration. It is always worth discussing the options that are available to you with your real estate agent.