The Powerful Insights to VA Loan Closing Costs

VA Loans Closing Costs:

VA home loans are a cornerstone of financial support for veterans and active service members, offering a pathway to homeownership under more accessible terms. These loans come with unique benefits, such as no required down payment and no private mortgage insurance. 

However, understanding all associated costs, including those beyond the principal and interest, is crucial. Being well-informed helps in making sound financial decisions and in fully leveraging the advantages of the VA home loan program.

Overview of Closing Costs

Closing costs are integral to the VA home loan process, encompassing a range of fees and expenses required to finalize a mortgage. These costs vary widely based on loan specifics, property location, and negotiations between buyers and sellers. Understanding these costs is crucial for both parties to navigate the home buying process effectively.

Detailed List of Closing Costs

The VA Funding Fee

• Overview: A mandatory fee supporting the VA home loan program, ensuring its sustainability by covering administrative costs.
• Determining Factors: The fee varies by loan type, borrower’s military service, and usage of the VA loan benefit.
• Exemptions: Certain veterans, such as those with service-connected disabilities or Purple Heart recipients, are exempt.

Loan Origination Fee

• Overview: Charged by lenders to cover the cost of processing the mortgage application.
• Negotiability: Varies between lenders, offering a potential negotiation point.

Loan Discount Points

• Overview: An option for borrowers to lower their mortgage interest rate, where each point costs 1% of the mortgage amount.
• Long-Term Benefit: Particularly beneficial for those planning long-term homeownership.

Other Closing Costs

• Seller’s Concessions: Include commissions, brokerage fees, and potentially the buyer broker fee and termite report.
• Negotiable Costs: Encompasses the VA funding fee, loan origination fee, loan discount points, credit report fees, VA appraisal fee, hazard insurance, real estate taxes, state and local taxes, title insurance, and recording fees.

VA Loan Closing Costs: What the Buyer Can Pay For

1. VA Funding Fee: A one-time fee paid directly to the Department of Veterans Affairs to support the VA home loan program.
2. VA Appraisal Fee: Cost associated with determining the value of the home to ensure it meets VA guidelines.
3. Credit Report Fee: Fee for obtaining the borrower’s credit report, which should be less than $100..
4. Origination Fee: A flat fee up to 1% of the loan amount to cover the lender’s costs. Alternatively, this can be itemized into specific allowable fees.
5. Title Insurance: Insurance that protects the lender and buyer against claims on the property such as liens or back taxes.
6. Recording Fee: The cost of recording the deed and mortgage documents in the public record.
7. Discount Points: Buyers may opt to pay for discount points to reduce their interest rate.
8. Flood Zone Determination Fee: Fee for determining if the property is located in a flood zone, which can be paid to a third party.
9. Mailing Fees for Refinancing: If refinancing, the borrower can cover the costs of mailing documents

VA Loan Closing Costs: What the Buyer Cannot Pay For

1. Real Estate Attorney Fees: Attorney fees for services related to the VA home loan are not allowable.
2. Real Estate Broker Fees: Fees associated with a real estate broker’s services cannot be paid by the buyer.
3. Agent or REALTOR® Fees: Fees for real estate agents are typically covered by the seller, not the buyer.
4. Application Fees: The lender cannot charge the buyer an application fee for processing the loan.
5. Escrow Fees: Fees for setting up an escrow account cannot be paid by the buyer.
6. Rate Lock Fees: Fees for locking in a mortgage interest rate are not allowed to be paid by the buyer.
7. Appraisals or Inspections Ordered by the Lender: While the buyer can pay for the VA-required appraisal, they cannot pay for additional appraisals or inspections that the lender orders.
8. Verification of Employment (VOE): The lender may not charge the buyer a fee to obtain a verification of employment.

Why Can’t The Buyer Pay Some Fees?

The VA home loan program includes guidelines to minimize the financial burden on veterans. For example, the seller typically covers real estate commission and brokerage fees to ensure the veteran does not bear these additional costs. 

The aim is to make homeownership more accessible to service members, veterans, and their families by limiting out-of-pocket expenses and allowing specific fees to be financed or negotiated between the buyer and seller.

Who Determines My Loan Details?

Most details of your home loan are not determined by us.

Your home loan lender will determine the following details of your loan:

• Interest rate
• Discount points (fees you may pay to your lender at closing to get a lower interest rate on your loan)
• Other closing costs

These rates may vary from lender to lender. It’s important to note that adding the VA funding fee and other loan costs to your loan could result in you owing more money than the fair market value of the home. This could diminish the benefit of refinancing, as your payment wouldn’t be as low as you may desire. Additionally, it might make it challenging for you to obtain enough money from the future sale of the home to pay off your loan balance.

Negotiating Responsibility for Closing Costs

The responsibility for covering closing costs can be negotiated between the buyer and the seller. While some closing costs, such as appraisal and recording fees, are typically the buyer’s responsibility, others may be negotiable. In some cases, sellers may agree to cover certain closing costs as part of the negotiation process, particularly in competitive real estate markets, or to sweeten the deal for the buyer.

Conclusion

Understanding and budgeting for the various closing costs associated with a VA home loan are crucial in home buying. Beyond considering the home’s purchase price, buyers must anticipate and plan for additional expenses such as appraisal fees, title insurance, and recording fees. By being aware of these costs and negotiating responsibility where possible, veterans and service members can navigate the home buying process smoothly and fully benefit from the advantages of VA home loans without unexpected financial strain.