What Are the Closing Costs?
Great question, and for a detailed list of what closing costs will or might show up on your loan, you can check out our article on new purchase loan closing costs. Rather than focusing on a detailed explanation of every little charge that might be in your closing costs (some of which can be as small as $15), we’re going to focus on the big-ol’ things that make closing costs thousands of dollars. There’s a few big ones, and we’ll cover them in enough detail that you’ll be able to understand clearly not only what they are, but also what they’re for. Some of things you may have heard of before (especially if you’ve bought a home before), but you may be surprised at how the VA loan program differs from conventional and FHA loans. The biggest things you’ll see affect your closing costs are the VA funding fee, the origination fee (or itemized charges taken together), paying for any discount points, and any advance mortgage payments.
First, the VA funding fee. It is likely to be 2.15% of the loan amount. It might be more if you are a Guard/Reservist, and it will be less if you make at least a 5% down payment. At 2.15%, the funding fee on a $200k house would be $4,300. The VA funding fee is how the VA mitigates the cost of the VA loan program for taxpayers. It is significantly less than you would end up paying in mortgage insurance on an FHA loan, and can be cut in half by making at least a 10% down payment. For VA borrowers who are receiving at least 10% disability, the funding fee will be waived and you will not be required to pay it. The same is true of surviving spouses of veterans who died in service or due to a service-connected disability.
In addition to a list of small fees the lender is allowed to charge regardless, the lender can choose to either charge a 1% origination fee, or itemize the many smaller fees related to originating the loan. Assuming the lender charges the 1% flat origination fee, on a $200k home, that would be another $2,000, bringing our total so far up to $6,300. That was reached by adding the VA funding fee and the 1% origination fee. The list of other fees and charges the lender can charge is quite reasonable. The funding fee and the origination charges are the largest chunks that will almost always be included in closing costs, but there are plenty of smaller charges that are also included, and there’s some larger charges that can be included, depending on the way you decide to do your loan.
You might elect to purchase discount points on your interest rate. Paying for a few discount points is usually a good idea if you’ve got the cash on hand to do so, since they can save you a great deal of money over the life of the loan. Each discount point generally costs 1% of the loan amount, so on the $200k house we’ve been talking about, each discount point would be $2,000. Generally, a discount point lowers your rate by around .25%. That may not seem like much, but usually the break-even point is around 5 years, so if you’re planning on staying in your home for longer than 5 years, discount points are usually worth it. These numbers are all estimations and averages, so get specific numbers from a VA-approved lender.
Lastly, on a new purchase loan, it may be written in such a way that your first mortgage payment or two is paid in closing costs, and the next payment you make is a month or two away. Many lenders do this to give them more time to sell the loan to a new loan holder before any payments on the loan are due. It makes things simpler for both the lender and the borrower. So, assuming my monthly payment on that $200k house is $1,500, and two of the payments are included in closing costs ($3k), I bought two discount points ($4k), the lender charged a 1% origination fee ($2k), and I was not exempt from the funding fee ($4.3k), I’ve hit $13,300 in closing costs without breaking a sweat. I know that’s probably bad news, but in many cases the seller is willing to pay or help with closing costs as a concession. If you’re worried about closing costs, speak with a VA-approved lender to find out what your options are.