Before the title to a property can be transferred from the seller to the buyer, a significant amount of money must change hands. In addition to the property’s price tag, the buyer needs to prepare to pay closing costs, which are the fees associated with the home purchase that must be paid at the closing of the real estate transaction by either the buyer or the seller. So if you’re planning to purchase a property using the VA home loan program, you will need to learn about VA loan closing costs.
Exploring VA Loan Closing Costs
With VA loans, the Department of Veterans Affairs agrees to guarantee a portion of mortgages that comply with the guidelines that it sets. The guidelines for VA loans are not limited to the eligibility of borrowers and the types of properties that can be purchased. They also extend to closing costs, which often include loan origination fees, appraisal fees, title fees, title insurance, taxes, deed-recording fees, and credit report charges. However, borrowers using a VA loan accept limitations with regards to the types of closing costs that they can pay. So when a buyer is financing a home purchase through the VA home loan program, how are VA loan closing costs handled?
The VA Funding Fee
VA loans require no down payment and no monthly mortgage insurance. They do require a funding fee, however. Due at closing, this fee is a percentage of the loan amount. It may be paid in cash or financed by rolling it into the total loan amount.
What percentage is required? That depends on the type of loan, the buyer’s military category, if they made a down payment, and whether it is their first time using a VA loan or not. It is important to note that some borrowers are not charged a funding fee. Veterans who are receiving VA compensation for service-connected disabilities and veterans who would be entitled to this compensation if they did not receive other payments are exempt. Likewise, surviving spouses of veterans who died in service or from service-connected disabilities are also exempted from this funding fee. How do borrowers know what percentage they will be expected to pay? The VA provides funding fee tables that offer a breakdown of what is owed.
Allowed and Non-Allowable Fees
While the VA sets the rules for funding fees, many of the other expenses involved in a home loan are set by others. For example, the lender determines the interest rate, discount points, and closing costs. That’s why these fees can vary from lender to lender.
Why does this matter to borrowers using a VA loan? The funding fee is not the only thing that they will need to pay at closing. Borrowers are allowed to pay some fees that are typically included in closing costs, including all of the following:
- Appraisal fee
- Credit report fee
- Title insurance fee
- Origination fee
- Recording fee
- Survey fee
However, borrowers using a VA loan are not allowed to pay several charges that are normally considered closing costs. As SmartAsset notes, these non-allowable fees include broker’s fees, attorney’s fees, prepayment penalties, and tax service fees. Borrowers are also barred from paying for underwriting, processing, and document preparation. In addition, if pest inspections or other additional inspections are required, the bill cannot be sent to the borrower.
So who pays for the non-allowable closing costs? With a little negotiation, the seller might shoulder some of this burden. As Realtor.com explains, the seller can pay up to 4 percent of the purchase price in seller concessions, and these funds can be used to cover expenses that the buyer is not allowed to pay. The lender may also pay some of the non-allowable fees by rolling them into the 1 percent origination fee that they are allowed to charge. Alternately, they may provide a credit in return for a slightly higher interest rate. In some cases, a builder may agree to pay for any additional inspections in order to secure the sale. Finally, the real estate agent may occasionally step in to cover non-allowable costs with a credit.
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Are you interested in utilizing a VA loan to make your housing dreams come true? Would you like to learn more about VA loans and how they can be used? Are you interested in exploring topics like second-tier entitlement or issues like VA loan closing costs? Contact PrimeLending: Manhattan, Kansas today to arrange a consultation.
Every year, we help thousands of veterans and active-duty members of the military buy or refinance their homes through the VA home loan program. With our assistance, you can take advantage of the many benefits of a VA loan while saving money due to our lack of lender fees. We offer 100% financing with competitive interest rates – no down payment or PMI required! To learn more, please give us a call at 785-560-3011 or contact us online. We would be happy to help you explore the types of VA loans available. It’s our turn to serve you!
