VA Loan Closing Costs
A particular misconception surrounding VA loans is their lack of closing costs. While VA loans come with no required down-payment, there are closing costs the borrower will have to pay, unless they receive enough credits from their lender or seller. These closing costs will, in total, equal between 1 and 5 percent of the loan amount, depending on the size of the purchase.
On the flip side, there are a few closing costs which the VA prevents lenders from charging VA-loan borrowers. And there are instances in which the seller can volunteer to pay all closing costs, thus relieving the borrower of any responsibility. In this article, we’ll look at which closing costs fall into which category and who ends up paying what.
Types of VA Loan Fees
First, let’s distinguish between three types of fees you’ll encounter at closing. First, there are VA and lender fees. These fees cover anything the VA or the lender had to do themselves, such as the loan origination fee and the funding fee.
Next, there are third-party fees. These fees cover anything paid for or performed by someone other than the seller or the lender. These include appraisal or inspection fees, recording fees, title fees, and attorney fees.
And lastly, some closing costs fall into the category of prepaid items, such as insurance or anything that goes into your Escrow account.
Closing Cost Fees the Borrower CAN Pay
Here’s a list of possible closing costs which lenders are legally allowed to charge to veteran buyers:
The origination fee is associated with a myriad of administrative costs that go into processing a loan. It’s paid to your lender and normally amounts to 1 percent of the loan amount. The origination fee includes many small costs, like document preparation fees, notary fees, processing fees, tax service fees, delivery fees, and marketing fees. However, sometimes lenders will forego an origination fee and instead charge borrowers for these smaller items independently.
Borrowers who want to lower their interest rate below the current market rate can buy discount points from their lender. One point equals a deduction of one percent off their interest rate. Sellers can also pay for these discount points.
Credit Report Fee
This fee covers the cost of ordering your credit report. It usually costs between $50 and $65. This fee is non-refundable and collected right when you apply. You’ll be charged for any subsequent credit reports pulled as well.
This fee covers the cost of a home appraisal, and can cost up to $450. This fee is normally paid when the appraisal is completed and is non-refundable, even if you don’t end up closing on the loan.
This fee covers your deed being added to county records and usually ranges from $20 to $75.
VA Funding Fee
This is a VA-established fee that helps cover the costs of the loan guarantee program. It is the VA’s version of private mortgage insurance (PMI). If you are receiving disability compensation from the VA, you may be exempt from paying this fee. Visit this link to learn more about funding fee exempt persons.
Such as assessments, property tax, and homeowners insurance: these are the items you’ll put in your escrow or impound accounts.
Real Estate Commissions and Fees
If you’re working with a listing or buying agent, either the borrower or the seller can pay their commission.
Hazard and/or Flood Insurance
If you’d like to, you can pay for these as a borrower. However, the seller can take them on as well.
Flood Zone Determination Fee
This fee covers the cost of determining whether or not your home is located in a flood zone, and whether or not you’ll be required to take out flood insurance.
Homeowners Association (HOA) Fees
If your property is located within a homeowners association, you may have to pay certain HOA fees annually, and you may choose to pay some of these at closing to get a head start.
Title Examination and Title Insurance Fees
In the process of getting your loan, a title insurance company will issue a title search on the home to make sure the property carries no outstanding judgments or liens. Depending on where you live and the size of your loan, this service can cost up to $600 or $800.
Home Warranty Fee
If you obtain a home warranty for your property, which can include repairs, you’ll have to pay this fee.
Fees the Borrower CANNOT Pay
There are some closing costs that the VA is not allowed to legally charge borrowers. Instead, these fees have to be paid by sellers, brokers, lenders, or some other third party. We’ll go more into who exactly pays these later. For now, here are the fees you cannot be charged as a borrower of a VA loan:
If attorneys helped at all in the loan process, you can’t be held responsible for paying them. In some states, attorneys are required to be present at closing and negotiation meetings. The only exception to this fee being paid by the lender is if the attorney did any title work. In that case, the lender is allowed to charge the borrower.
VA lenders are not allowed to charge their borrowers pre-payment penalties.
HUD/FHA Inspection Fees
Appraisals which the lender performed themselves, except on construction loans. In the case of a construction loan, the lender can charge the borrower for these fees.
Closing Protection Letter (CPL) Fees
A closing protection letter acts as a contract between lenders and title insurance underwriters. It protects the title company of the home from becoming responsible for mistakes made by the closing agent.
Escrow and/or Settlement Fees
All fees having to do with closing, settlements, or escrow accounts (which can be expensive) cannot be charged to the borrower.
Here are some other non-allowable fees:
- Document preparation fees
- Brokerage fees
- Interest rate lock-in costs
- Overhead, postage, stationary, and telephone charges
- Amortization fees
- Underwriting or processing fees
- Entrance fees
- Notary fees
- Fees charged by trustees
- Fees charged by secondary purchasers or marketers
- Tax service fees
- Pest inspection fees
- Survey fee
So, Who Pays Them?
So if the veteran can't pay these fees, who does?
Using lender credit, the lender can offset these non-allowable fees and offer credit to the borrower in the form of an interest rate adjustment. It sort of works like bonus points, except it’s the lender paying the borrower. Here’s an example: let’s say a borrower is approved for a 30-year fixed mortgage at a 3.5 interest rate. In this case, the lender could give the buyer a lower rate if the borrower pays them back one point. So, the borrower could choose between a 3.25 interest rate, having bought one point from the lender, or they could stick with the 3.5 interest rate and have no points. That or the lender can raise the borrower’s interest rate in exchange for credit that would go towards the closing fees.
If the borrower hired a real-estate agent, the agent can take on some of the closings costs in the form of credit by splitting the commission with the seller’s agent. The laws on whether or not an agent can do this vary between states, so make sure to check first.
If the buyer and seller negotiate accordingly, sellers can increase their selling price by the amount of money it would cost to cover all closing fees. Then they can use that extra money to pay the fees themselves, and the cost of doing so is financed into the loan for the borrower to pay later. This is legitimate so long as the home appraisal reaches the increased price. There is also a 4 percent limit as to how much the seller can pay in concessions; that is, costs not directly impacting the life of the loan. For example, if the home is appraised at $300,000, then the most the seller can pay in concessions is $12,000. Concessions include things such as judgments, collections, and prepaid taxes or insurance.
In paying the 1 percent origination fee, the borrower effectively pays for itemized fees contained within it, such as processing fees or the cost of printing.
Ask Your Lender for Disclosures of All Fees
Keep in mind that there are probably other fees out there which we haven’t listed that could crop up depending on your personal situation. Ask your lender to disclose to you a free, complete list of allowable and non-allowable fees. They’re required by law to do this if you ask.
Keeping Our Borrowers Informed
The VA loan process, like any loan process, can be complex and sometimes confusing. But at Low VA Rates, we believe in being up-front and honest with our borrowers with every transaction. If you still have questions about VA closing costs and what you can be charged, give us a call at 866-569-8272 or visit our website for more information.