As the name implies, closing costs are the costs that you have to pay when you close on a home loan. However, one of the many advantages of using a VA loan from the U.S. Department of Veterans Affairs’ home loan program is that VA loan closing costs are a little different. Understanding these differences can help you prepare so that you know what to expect when it’s your turn to close on a house.
Understanding VA Loan Closing Costs
With any home loan, you’ll be required to pay closing costs. What makes a VA loan different? As the VA explains, two twists set your trip to the closing table apart when you’re using a VA loan. First, VA borrowers will need to pay a VA funding fee. Second, the VA sets limits on what traditional closing costs a borrower can pay.
The VA Funding Fee
The VA funding fee is a one-time charge that is unique to VA loans. Due at closing, it is used to help maintain and fund the VA home loan program, reducing the program’s reliance on taxpayer funding. The VA funding fee can either be paid in full or rolled into your loan. How much will you pay? As the VA indicates, that depends on a few different factors:
- If your down payment is less than 5% on a VA purchase loan, and it’s the first time that you’ve used a VA loan, then your VA funding fee will be 2.30%.
- If your down payment is less than 5% on a VA purchase loan, but you’ve used VA loans in the past, then your VA funding fee will be 3.60%.
- If your down payment is more than 5% but less than 10% on a VA purchase loan, then your VA funding fee will be 1.65%.
- If your down payment is more than 10% on a VA purchase loan, then your VA funding fee will be 1.40%.
- If you meet certain requirements, you may be exempt from the VA funding fee. You would still be required to pay other closing costs.
Other VA Loan Closing Costs
What about other closing costs? The VA puts limits on what closing costs a VA borrower is allowed to pay. Investopedia provides a handy list of which fees borrowers are permitted to pay:
- VA funding fee. As discussed above, the VA funding fee helps keep the VA loan program functioning and strong.
- VA appraisal fee. The VA appraisal ensures that the property meets the VA’s standards for safe, sound, and sanitary. It also checks that the home is worth what you’re paying for it.
- Origination fee. This is a general fee charged by the lender to cover their costs for processing the loan. The VA allows an origination fee of up to 1%.
- Taxes and insurance. As a new property owner, you are responsible for paying the associated property taxes and insurance premiums.
- Recording fee. After a real estate transaction is completed, the change must be legally recorded by the local government.
- Discount points. Buying discount points is a way to purchase a lower interest rate for your loan. It’s completely optional.
What happens with the remaining closing costs? Who pays them? As Military.com reports, there are several ways to handle the remaining fees:
- The seller pays. Sellers are limited to paying 4% of the buyer’s closing costs. Why would they do so? They can make a deal to do it while negotiating the sales price of the home.
- The agent pays. An agent may offer a credit at the closing table in order to offset closing costs.
- The lender pays. A lender may offer a credit. In many cases, this takes the form of a slightly higher interest rate in return for a credit towards the closing costs.
- The borrower pays. How can borrowers pay fees they aren’t allowed to pay? The answer lies in origination fees. Some lenders who normally don’t charge them will use this allowable fee to collect for costs that they typically would charge that the VA doesn’t allow.
Product info as of 11/15/21, subject to change.