A VA Home Loan, you may be aware, offers up to 100% financing for eligible veterans and military service members. This means that the Department of Veteran Affairs VA Loan program allows qualified borrowers the ability to purchase a home with no down payment and no required mortgage insurance.
However, up to 100% financing does not mean that there are no out of pocket costs for veterans using their VA Home Loan benefit. Most home purchase transactions have closing costs: typical expenses in a mortgage and real estate transaction outside of the purchase price of the home. These closing expenses might include things such as VA funding fees, loan origination fees, VA appraisal fees, credit report fees, insurance and real estate taxes, discount points, and title costs.
The good news? It is common practice in negotiations for the seller to pay for some closing costs and there are protections in place to limit the total cost of allowable origination fees charged to the buyer.
Here is an overview of some common costs associated with purchasing a home using your VA loan benefits.
VA Funding Fee
The VA funding fee is established by the Department of Veteran Affairs to help offset the cost of the VA loan guaranty program to taxpayers. The fee is a percentage of the loan that can vary depending on factors including your military category, whether it is your first time using your VA loan benefit, and whether you make a down payment.
The current funding fee for regular military personnel making no down payment on a first-time VA loan is 2.15%. Veterans who receive VA compensation for a service related disability, or a surviving spouse of a veteran who died in service or from a service related disability, do not have to pay a VA funding fee.
Loan Origination Fees
A loan origination fee is charged by mortgage lenders to cover the administrative costs associated with processing your loan. The lender may charge up to 1% of the loan as a flat origination fee, or the fee may be itemized at no greater than 1% of the loan. No matter how the origination fees are presented, the lender cannot charge you more than 1% to cover the cost of loan origination and processing.
VA Appraisal Fees
A VA appraisal is a required part of the VA loan process where an appraiser determines the value of the property. The cost of the appraisal depends on the location of the subject property and the type of residence but typically ranges from $475-$700.
Credit Report Fees
When you apply for a mortgage, the lender will pull your credit report. Typically, the cost is around $50, but this can vary based on the lender.
Insurance and Real Estate Taxes
At closing, lenders will often collect advanced payments on your required homeowners insurance policy and property taxes. This is commonly referred to as an ‘escrow account.’ Holding the funds in a third-party escrow account helps ensure the buyer’s ability to afford to pay the property taxes and home insurance on their new home, which is important for lenders to help mitigate potential loan risks.
Many states offer property tax exemptions for fully or partially disabled veterans. Consult with your tax advisor to see if you may be eligible.
Discount points are fees paid to the lender at closing to reduce your interest rate. This is also commonly referred to as “buying down the rate.” Lenders will often quote you with the current mortgage rates and discount point options, which fluctuate daily.
During your home loan process, a title company will complete a title search to verify that there are no outstanding liens or legal claims against the property. Most lenders will also require title insurance, an insurance policy that covers the lender’s interest in the property if any liens are discovered after closing.
Who pays closing costs?
Closing costs may be paid by the buyer, the seller, or shared. It is common practice for sellers to pay some, or all, of the closing costs, but it is not required. With the help of your real estate agent, you can negotiate any closing costs and seller concessions into your offer.
Under the VA rules, the seller can pay for up to 4% of the total loan amount in ‘concessions’. As defined by the VA these concessions are “anything of value added to the transaction by the builder or seller for which the buyer pays nothing additional and which the seller is not customarily expected or required to pay or provide.” Items subject to the 4% rule include the buyer’s VA funding fee, prepayment of property taxes and insurance, gifts such as a TV, extra discount points, or payment of the buyer’s credit balances. So in addition to customary closing costs associated with the loan, you can negotiate with the seller to pay up to 4% of the loan in seller concessions.
Closing costs must be paid at the time of closing. The VA funding fee is the only closing cost that is allowed to be financed into the loan amount.
Though this is not a comprehensive list of closing costs, it does give you an idea of the types of expenses you might face when purchasing a home. The good news is that your lender is required to provide a Good Faith Estimate of charges you will likely occur at closing. Closing costs are a normal part of every home buying experience when financing a home.
Do you have questions about closing costs or your VA loan benefits?
Contact us by filling out the form below, and one of our VA Loan Specialists will be in contact. Thank you for your service!