Deciphering the VA Lender’s Handbook Chapter 8 Part 2
This article is best read in conjunction with the Chapter 8 Part 1 article, which covers the fees and charges that a veteran-borrower can pay. You’ll remember from that article that the lender is permitted to charge a flat Origination fee of 1% of the loan amount that is intended to cover the large majority of fees that the lender themselves would normally charge. Nearly every other charge aside from the origination fee that the borrower can be charged is one that comes indirectly from a third party. For example, the credit-reporting agency charges the lender for a credit report. The amount the lender paid is then charged to the borrower at closing to reimburse the lender for the expense. Those types of charges are generally the only ones that can be charged in addition to the 1% origination fee.
The first fees that need be mentioned here are attorney’s fees. The lender is not permitted to charge the borrower for any attorney’s fees. Title examination work and title insurance are exempt from this and can be charged to the borrower, but other attorney’s fees are not able to be put on the borrower. Keep in mind that this does not bar the veteran-borrower to seek legal representation and pay for it themselves. The VA Lender’s Handbook says it quite clearly, “…the veteran can independently retain an attorney and pay a fee for legal services in connection with the purchase of a home. Closing documents should clearly indicate that the attorney’s fee is not being charged by the lender, but is being paid by the veteran as part of an independent arrangement with an attorney.”
Another thing that borrowers are not allowed to be charged by lenders for are brokerage fees. To be clear, fees or commissions charged by a real estate agent or broker in regards to the VA loan the borrower is getting can not be paid for by the veteran-borrower. To be frank, the VA considers paying for a real estate agent or broker to be an unnecessary expense, since information on residential property is so widely available through a variety of channels. The VA does not necessarily prohibit veteran-borrowers from using a real estate agent, but the seller would have to be willing to cover the cost of both their real estate agent and the borrower’s agent. Since this is far from a guaranteed scenario, many VA borrowers look for homes on their own and work with a VA-approved lender on getting the paperwork taken care of. Most VA-approved lenders are very used to VA-borrowers not having agents and are great at helping out the borrower with any questions they have.
A veteran is also not allowed to pay prepayment penalties, whether on a loan that they are refinancing or on a lien on the seller’s property. Prepayment penalties are nasty beasts, and not allowing veterans to pay them on VA loans is a thumbs-up to the VA. Honestly, even on conventional loans, there are enough lenders out there that do not have prepayment penalties that you should have no problem avoiding them. Sometimes the seller of a home may have a prepayment penalty, but for a VA borrower, the seller will not be able to push it off onto them. In some cases, this may make the seller reluctant to sell to the veteran, but this isn’t usually too much of an issue.
The last fee that we’ll cover applies exclusively to construction loans. Borrowers are not allowed to pay for the HUD/FHA inspection fees. The VA Lender’s Handbook explains it this way: “In proposed construction cases in which the dwelling was constructed under the Department of Housing and Urban Development (HUD) supervision, the cost of any inspections or re-inspections must be borne by the builder or sponsor and are not chargeable to the veteran-purchaser. This includes:
• re-inspections by VA or HUD of onsite or offsite work for which an escrow
agreement was established, and
• any additional re-inspections deemed necessary by VA to assure conformity
with VA regulations.
Since most lenders are not currently offering VA construction loans, this is unlikely to come up, but if a VA-approved lender tries to charge you any of the things we’ve discussed in this article, that should be a major red flag and you should definitely seek to understand what is going on. You may want to seek a different lender.