Understanding VA Loan Closing Costs
If you’re an eligible veteran, active duty service member, or surviving spouse you may qualify for a VA home loan backed by the US Department of Veterans Affairs (VA). VA loans offer many advantages compared to traditional loans. For example, they offer no down payment required, no private mortgage insurance (PMI) for putting less than 20% down, competitive interest rates, more flexible credit requirements and reduced closing costs.
Some fees are unique to the VA loan, and you’ll find that your VA loan closing costs differ from other mortgage program options. Understanding the closing costs for VA loans can determine how much you can afford and help you determine how much you need to save.
While VA loan closing costs are often much lower than traditional loans, they’re something you should be aware of as you begin the homebuying journey. But what are VA loan closing costs, how are they different from other types of mortgage loans, and how much should you save?
What are closing costs?
Closing costs are fees you pay to your lender at the time of closing. They cover everything from home appraisals to administrative tasks like searching the home’s title. Generally, the closing costs you pay depend on where you live and the type of loan you choose.
You can expect to pay anywhere from 2% to 6% of the total loan amount, but it can be much higher depending on the home’s location. For example, California closing costs can be as high as 11% of the total sales price of the home (including real estate commissions, which typically the seller pays).
These costs don’t include the down payment but may still be negotiable. For example, buyers can ask sellers to pay for part or all of the closing costs. Both buyers and sellers can pay closing costs, but these fees typically fall on the responsibility of the buyer.
Additionally, there’s no set amount for how much closing costs will be because they depend on the location and type of loan. However, they’ll cover the following fees associated with your loan:
- Application fee: When you apply for a loan, the lender might charge a fee to process the application.
- Appraisal: Lenders often order an appraisal through a third-party company that will determine how much the property is worth. The appraiser must be approved by the Department Of Veteran Affairs as a certified VA appraiser.
- Attorney’s fees: Depending on where you live, you might need a lawyer to coordinate your closing and create paperwork for a title transfer.
- Closing fees: Closing fees are used to pay the escrow company that conducts the closing.
- Credit reporting: Mortgage lenders often have to pay to access your credit reports, and those fees will be added to your closing costs.
- Escrow funds: Escrow funds hold money for property taxes, insurance premiums, and private mortgage insurance. There are administration fees associated with them because your lender will take care of making payments on your behalf.
- Loan origination: Loan origination fees cover the processing and underwriting of the loan.
- Pest inspection: Some states require a pest inspection before you can close on a loan. These inspections are required by any VA loan applicants, regardless of the state where you live.
- Underwriting fees: Underwriting fees pay for the lender to verify the paperwork associated with your application and loan.
How VA loan closing costs are different
VA loans often come with lower closing costs, but what you pay for differs slightly from traditional home loans. In addition, VA loans have restrictions on the types of fees you can be charged to support borrowers’ dreams of becoming homeowners.
Here are a few differences between traditional and VA loan closing costs:
Non-allowable fees are fees that a lender cannot require VA loan borrowers to pay, which may include prepayment penalties and the lender’s attorney fees.
If a particular fee is considered non-allowable, another party, such as the seller, will cover the cost. However, in most cases, the lender or real estate agent will take care of the additional fees. To compare VA loan closing costs to traditional mortgages, you must understand which fees are considered allowable and non-allowable.
Non-allowable fees include:
- Any origination fee exceeding one percent of the loan amount
- Attorney’s fees
- Brokerage fees
- Prepayment penalties
- HUD and FHA inspection fees
All other fees associated with the closing cost, including the origination fee, are considered allowable.
VA funding fee
VA loans require a VA funding fee at closing. This fee goes toward administrative costs for the loan program. The funding fee is determined by the down payment and type of loan. For example, VA Streamline Loans and VA purchase loans often have different funding fee requirements.
The VA funding fee is a one-time fee you pay to the Department of Veterans Affairs instead of the lender. It’s meant to help support the VA home loan program and provide other veterans and service members with the same opportunities for homeownership. However, your funding fee depends on your down payment, and the larger your down payment, the lower your total cost.
Some VA loan borrowers may be exempt from the VA funding fee. These fees do not apply to individuals receiving VA compensation for service-related disabilities or Dependency and Indemnity Compensation (DIC) as a surviving spouse. Members who have received a Purple Heart are also exempt.
The VA funding fee is sometimes considered the VA loan private mortgage insurance, but it’s crucial to differentiate between the funding fee and PMI. Unlike traditional mortgage insurance, the funding fee is a single payment given to the VA to support the program rather than to protect the lender.
For 2023, you can expect to pay a 2.15% funding fee on your first home purchased with a VA loan if your down payment is less than 5%. However, as we said, you can reduce your funding fee cost by increasing your down payment. For example, first-time VA borrowers who put more than 10% down are only required to pay 1.25%.
This fee is considered a closing fee and is due at the time of closing. You’ll give the money to your lender, who will pay the VA on your behalf.
Additionally, if the VA funding fee is too expensive for you, there are other options. For example, you could pay upfront at closing, finance as part of the loan, or ask the seller to pay it for you. Be careful when rolling your funding fee into the loan because it increases your total loan amount, so you’ll pay more over the life of the loan.
Limited origination fee
Mortgage origination fees are considered allowable fees, and a lender can charge them for the underwriting and processing of the loan. However, there are limits to how much a lender can charge for origination.
For example, lenders can’t charge borrowers more than 1% as an origination fee when using a VA loan.
Specialized VA appraisal fee
VA appraisals can be more expensive than traditional home loan appraisals. The VA requires a specialized appraisal to determine the home’s value and if it meets the VA’s minimum property requirements.
The specialized VA appraisal is meant to protect veterans from purchasing unfit or overvalued properties to ensure you pay what the home is actually worth. They also use it to ensure the home is worth enough so that if you default on your loan, the VA and the lender are protected.
Additionally, the main purpose of the appraisal is to ensure the home is safe and ready to be lived in. Ultimately, it must meet the VAs property guidelines to ensure it’s in good enough condition and won’t put the borrower into more debt.
VA loan appraisals are similar to conventional home loan appraisals. They both aim to ensure the home is neither undervalued nor overvalued by comparing it with market prices. In both cases, the appraiser compares the subject to comparable properties to determine the true value of the home. They also look for serious issues with the home and recent upgrades that can increase its value.
Traditional appraisals only consider the fair market value of the home. The VA appraisal is designed to ensure the property meets several VA requirements to ensure its safety. For example, they’ll look at major structural defects or issues that can prevent the home from being in move-in-ready shape.
So what are the VAs minimum property requirements? Ultimately, the goal is to ensure the home is livable, and the requirements include the following:
- Space: The VA appraisal ensures that the home has enough space for you and your family. This includes an adequate number of bedrooms, cooking and dining areas, and bathrooms. The VA doesn’t require the home to be large, but it must be large enough for your family.
- Access and encroachments: Access refers to the ability to access the home from the street. It also cannot encroach on—or extend beyond the property line— of the neighboring properties.
- Hazards: The VA appraisal ensures the home is free of hazards like flood zones, sinkholes, asbestos and other threats that are a threat to your health.
- Utilities: The VA requires every house to have electric, gas and air conditioning systems properly installed and in good working condition.
- Structure: The VA loan requires the property to have good structural integrity, with a roof, crawl spaces, basements and attics free from pests and mold.
The VA won’t allow you to get the loan if the home doesn’t meet the minimum property requirements. In this case, you have a few options such as asking the seller to make the necessary repairs, or canceling the sale of the home.
Once the appraisal is complete, you’ll know the market value of your home. Unfortunately, sometimes the appraisal value comes in much lower than the agreed-upon price. This means the VA won’t give you that amount because it exceeds market value. In these cases, the seller must lower the sales price or agree to pay the difference for you to close on the loan.
Mortgage discount points
Mortgage discount points can help you lower your interest rate before closing on the loan by locking a lower interest rate during the homebuying process. Mortgage discount points are a type of fee you pay to receive a lower interest rate.
These points are paid at closing and will reduce your rate to save you more money on the life of the loan. Additionally, with a lower interest rate, you can expect lower monthly payments. Discount points can be used for permanent rate buydowns or temporary rate buydowns, such as a 2-1 temporary buydown mortgage. The discount points can be paid by the seller in the form of a seller credit.
We pay property taxes to fund local initiatives, schools, libraries and police and fire departments. Your property taxes depend on the location and the value of the home. Therefore, your taxes are subject to change, likely increasing every year.
Additionally, home improvement projects or additions that increase the value of your home can increase your tax burden. Some states offer property tax exemptions for VA homeowners, so you should contact your local veteran office for more information.
All lenders and all mortgage programs require you to purchase homeowners insurance. Homeowners insurance protects a lender’s security by ensuring the property that serves as collateral can get repaired if something happens to it.
Even if, for some reason, it’s not required by a lender, VA borrowers should still have homeowners insurance in case of fire, accidents and severe weather.
Additionally, VA homeowners may need a special type of homeowners insurance. VA loans often come with a vacancy clause which could get triggered if you spend an extended period of time away from your home. For example, if you are a VA homeowner and get deployed overseas, anything that happens to your house might not be covered under your insurance.
VA borrowers should discuss their status with insurance providers to ensure they get the right type of insurance to cover losses that happen while they’re away.
Conventional mortgages often require private mortgage insurance (PMI) if you make a downpayment of less than 20%. The purpose of PMI is to protect the lender if you default on your loan. PMI can dramatically increase your monthly mortgage payments.
VA loans don’t require PMI, regardless of how much you put down on the home. So you could put down 0% and not have to pay any additional private mortgage insurance. This helps you save on the total cost of your home purchase.
Paying your VA loan closing costs
The average VA closing costs range from 2% to 6% of the total home value. However, how much you pay largely depends on your loan and location. You can also roll your funding fee into the total mortgage amount, but this means increasing your loan and paying more for the house in the long run.
The buyer, seller and lender are responsible for paying different parts of the VA loan closing costs. The buyer is responsible for most of them.
As we’ve mentioned, there are some non-allowable fees the lender will have to incur. The seller is responsible for several closing costs, but they can’t pay more than 4% of the total home loan. Their fees include real estate agent commissions, brokerage fees and termite inspection fees.
The buyer is responsible for the bulk of the closing costs, including the VA funding fee, origination fee, mortgage points, appraisal fee and other allowable fees. However, you can negotiate with the seller to cover some of these costs.
Closing costs for VA loans differ based on the type of VA loan. For example, you’ll pay lower funding fees on VA purchase loans than you will on VA cash-out refinance loans. Meanwhile, VA IRRRLs offer the lowest funding fee without requiring an appraisal.
Applying for a VA loan
Now that you understand the closing costs for a VA loan, it’s time to gather all the necessary paperwork and documentation to apply.
The requirements for being eligible for this type of loan are much stricter in some areas than others. To qualify for the loan, you must meet the minimum service requirement and receive a certificate of eligibility (COE) from the VA.
The COE is a document that tells the lender that you qualify for a VA loan. Every service member earns VA entitlement as a benefit. This entitlement is a dollar amount that the VA agrees to pay a lender if you default on the loan.
The amount of your entitlement that can be used for a loan depends on how much of it you’ve already used. Your COE lists the dollar amount currently available to you. If you haven’t already requested your COE from the VA, Griffin Funding can do it for you if we determine you’re eligible for the loan.
In addition, veterans will need to submit a DD Form 214 that verifies their discharge from the military. Active duty service members will need a statement of service signed by a unit commander or personnel officer.
Once you’ve determined your VA loan eligibility, you’ll need to gather a few important pieces of information to share with the lender, including the following:
Lenders prefer that all VA loan borrowers maintain a steady two-year job history.
However, this requirement is at the lender’s discretion, so if you’ve recently changed jobs but stayed within the same industry, you may still qualify for the loan.
Like other types of home loans, the lender will look at your income versus your debt. This is to measure your debt-to-income ratio and determine whether you can afford to repay the loan.
Typically, lenders like to see a DTI of 43% or lower.
The credit score required for VA loans varies by lender, but most prefer you have a score of at least 620 to be eligible.
However, you can still get a VA loan with bad credit because the VA doesn’t have a minimum requirement.
You can use a VA loan to purchase primary residences, including single-family homes, condos and manufactured homes.
Not all lenders will finance loans for all property types. Therefore, ensure you choose a lender based on the types of property they’ll finance with a VA loan.
Additionally, you can’t use a VA loan for vacation homes or investment properties unless they are your primary residence.
VA loans don’t require a down payment. However, the higher your down payment, the lower your interest rate.
Additionally, some lenders may have specific requirements for no-down-payment VA loans. For example, they can require certain credit scores if you put down less than 10 or 20%.
The VA funding fee ranges from 1.25% to 3.3% of the total loan amount for first-time VA loan purchases. Your funding fee may be less if this is your second time using your VA loan.
Reserve funds are the money you have left over after paying for the loan and associated closing costs.
Lenders like to see that you can make payments after closing and have something left over in case of an emergency. While reserves aren’t always required, you should be able to show that you have at least two or three months’ worth of mortgage payments in your bank account.
Taking advantage of VA loan benefits
Taking advantage of VA loan benefits can help you achieve your dream of homeownership at a lower cost. Instead of waiting until you’ve saved enough for a down payment, you can purchase a home right now if you meet our minimum requirements.
Closing costs for VA loans vary by lender and location, but we’re here to make the process of becoming a homeowner easier for you. Griffin Funding is a premier provider of VA loans, and we’re standing by to answer your VA loan questions.
Ready to start becoming a VA borrower? Get a quick quote or start the application today.
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