VA Loan Closing Costs: How to Prepare For Your Home Purchase?

“VA Loan Closing Costs “:

VA loans provide military service members, eligible veterans, and qualifying surviving spouses with the chance to purchase a new home without needing a down payment from the Department of Veterans Affairs (VA). Yet, this doesn’t imply you can complete the purchase without any funds available. It’s important to be mindful of the closing costs associated with VA loans as you proceed through the process of buying a home.

What exactly are the closing costs you need to be prepared for when it comes to a VA loan? Let’s examine this in more detail.

What Are VA Loan Closing Costs?

Whenever you finance a home purchase with a mortgage, you’ll encounter closing costs. These costs are essentially the fees charged by the lender for their services in generating your loan.

The term “closing costs” encompasses a variety of fees you’ll face during the closing phase, such as the cost for a home appraisal and conducting a title search. VA loans carry specific charges unique to this loan type, including the VA funding fee, which will be explored further in the next section.

Closing costs are due when you sign the final documents of your home mortgage process. At this point, you’ll need to present any required down payment and cover the closing costs of the loan. It’s crucial to remember, particularly in the context of VA-insured mortgages, that a down payment is often not required.

VA Loan Closing Costs: What Sets Them Apart?

In the realm of VA home loans, the structure of closing costs distinguishes itself from that of traditional mortgage loans. Here’s how closing costs in the VA loan process differ from the norm.

Non-Allowable Fees Opting for a VA loan exempts you from certain fees that lenders are not permitted to charge, known as non-allowable fees. These can include settlement charges, attorney fees charged by the lender, and any prepayment penalties.

For other mortgage types, such as conventional loans, you might be expected to cover lender’s attorney fees and settlement charges. A VA loan spares you from these expenses.

Yet, there are still allowable fees you may need to pay, including the VA funding fee, loan origination fees, recording fees, fees for credit reports, discount points, title insurance, and other closing-related fees.

Capped Origination Fee Origination fees, charged by lenders for processing and underwriting the loan, have a cap when it comes to VA loans.

VA loan users cannot be charged an origination fee exceeding 1% of the total loan amount. This is comparable to the typical range of 0.5% – 1% found with other mortgage types.

VA Funding Fee A distinctive charge for VA loans is the VA funding fee, a one-off payment to the Department of Veterans Affairs meant to ensure the VA loan program’s sustainability.

The amount of this fee varies based on the type of loan (purchase or refinance), the number of times you’ve utilized your VA loan benefit, and the size of your down payment. The funding fee is a percentage of the loan amount, thus a higher down payment reduces the funding fee.

VA Funding Fee Example

For instance, a down payment below 5% on your first VA loan home purchase would result in a 2.15% funding fee of the total loan amount. A down payment of 10% or more lowers the fee to 1.25%.

Exceptions exist where the funding fee is waived, including for veterans receiving VA disability compensation, surviving spouses of veterans who died in service or from service-connected disabilities, and Purple Heart recipients. Consult your mortgage lender to confirm eligibility for a funding fee waiver.

VA Appraisal Fee A VA loan involves a specific VA appraisal fee as part of the closing costs, usually ranging between $425 and $875.

Discount Points Like other home loan options, VA loans offer the possibility to purchase mortgage discount points. This decision requires weighing the upfront cost against potential long-term savings. Our comprehensive guide on mortgage points can assist in making this decision.

Understanding Closing Costs for VA Loans

When it comes to VA loans, understanding who bears the cost of closing is crucial. The buyer, seller, and lender each play a role in covering various portions of these costs.

Seller’s Responsibilities The seller’s contribution to closing costs is capped at 4% of the total loan value. They are typically responsible for paying the commissions for both the buyer’s and seller’s real estate agents, any brokerage fees, and fees related to termite and well-water inspections if required.

Buyer’s Obligations As a buyer utilizing a VA loan, you will be responsible for covering the VA funding fee, loan origination fee, loan discount points, the VA appraisal fee, title insurance, among others. However, there’s room for negotiation. You can request seller concessions, which could cover a portion of your closing costs, including property taxes, title fees, or even the entire funding fee.

Lender’s Contributions The lender also takes on some of the closing costs, such as attorney’s fees. The VA imposes limits on certain fees, like the origination fee, to keep the buyer’s expenses manageable.

Frequently Asked Questions About VA Loan Closing Costs

• How much are the average closing costs for a VA loan? Closing costs usually range between 3% – 6% of the loan’s total value, depending on the specifics of your home purchase and loan details.
• Can closing costs be included in my VA loan? If you’re unable to pay your closing costs upfront, the VA loan program allows for the rolling of certain costs into your loan amount. Notably, the funding fee can be financed this way, though it might result in a higher interest rate. While not all closing costs can be financed, seller or lender concessions can reduce the need for upfront cash.
• Are VA loan closing costs tax-deductible? The VA funding fee, a significant part of your closing costs, is generally tax-deductible. If you choose to finance the funding fee, you can only deduct the portion paid within the year.

Conclusion

For veterans, leveraging the VA loan benefit is a powerful way to secure your dream home more swiftly. While there are specific closing costs you’ll need to prepare for, such as non-allowable fees and the capped origination fee, the requirement for a down payment is often waived, underscoring the value of this military service benefit.

Embarking on Your Home-Buying Journey? Consider applying for a VA loan with Elevation Mortgage to start your search today.