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Section 2.8
Closing Costs for VA Loans
If you want to buy a home (or, eventually, refinance), you will need to prepare for closing costs.
All home loans, regardless of type or size, come with closing costs. These help pay for the time and effort your lender, and others, spend creating and finalizing your loan.
But as a first-time home buyer, you might not be very familiar with what closing costs are, how they work, what they cover, or how much you should expect to spend. Don't worry—you're about to get a crash course in all things closing costs.
What are closing costs?
Ok, so you already know that closing costs are expenses associated with the creation and processing of your loan.
But did you know that they're also usually just a one-time expense?
While there are exceptions—especially with VA loans, but we'll get to that in a minute—closing costs are usually only paid at (you guessed it!) closing.
Though there are several different types of closing costs, they can usually be broken down into just a couple of different categories:
- Lender fees
- Property-related fees
- Miscellaneous fees
Under lender fees, some of the types of closing costs included are things like your credit report, an origination fee for the loan, an application fee, underwriting fees, discount points, etc.
Property-related fees, on the other hand, are charges associated with the property itself. These include things like a title search, title insurance, survey fee if needed to confirm property lines, prepaid property taxes, prepaid homeowners insurance, a home appraisal, and possibly even a home inspection.
Some of the closing costs on your loan may not fit neatly into either the property-related or lender fees, so we like to categorize them as miscellaneous fees. On VA loans, the VA funding fee is a common closing cost that falls under this category.
Now, as one final note, it's important to recognize that down payments are considered a type of closing cost. Luckily, if you're getting a VA loan, this difference isn't something you really need to worry about, since VA loans don't require a down payment.
How much you need to save up for closing costs
How much you pay at closing depends on a variety of factors. These include things like the type of loan you're getting, what city and state you're purchasing in, and the price of the home.
But if we were to give you a ballpark range, most experts agree you will usually end up paying anywhere from 3–5% of your loan amount, though for VA loans it can often be even lower.
So, if you're planning on budgeting for a $300,000 home, you'll probably need to save around $9,000–$15,000 in closing costs.
Ways to reduce your closing costs
Closing costs can add up to a big chunk of change. But before you let that scare you away, you should know that you may be able to reduce your closing costs using one or more of the following methods:
- Shopping lenders
- Apply for closing cost assistance
- Ask for seller concessions
- Rolling closing costs into your loan
- Getting a "no closing cost" loan
Now, before you get too excited about that last one, let's go over some of the details about each of these options that you should know.
Shopping lenders
One of the easiest and biggest ways to save on closing costs is by shopping around for a lender and not just going with the first one you talk to.
Here's the truth: not all lenders charge the exact same closing costs. Shopping around gives you the opportunity to compare the estimated closing costs of different lenders so you can pick the most affordable option.
As an example of what we mean, here at Low VA Rates, we waive our origination fee on all VA purchase loans. On that $300,000 house, that means your closing costs will decrease by $3,000!
And unlike the other options for reducing your closing costs, there's literally no downside to this method! It doesn't cost you anything extra to shop around, and you can be confident you're getting the better option.
Apply for closing cost assistance
Many states and counties offer closing cost assistance programs. There are even nationwide programs that are available specifically to servicemembers and veterans.
For tips on how to find these programs, here's a link to a video on our YouTube channel that can help you kick off your search: https://youtu.be/Gx8hR5-ippQ
Ask for seller concession
The VA allows sellers to pay up to 4% of the borrower's closing costs on a VA loan.
However, this tactic really only works if you're in a buyer's market, which is where there's less demand for homes. When homes stay on the market for longer, sellers may be willing to pay some of your closing costs—again, up to 4%—in order to help their home sell.
But if it's a seller's market and the demand for homes is high, asking for concessions can make your offer less competitive and cause you to miss out on a home you love.
Rolling your closing costs in your loan
On VA purchase loans, you're allowed to roll the funding fee into your total loan balance so you don't have to pay it out of pocket at the time of closing.
For most first-time homebuyers, the funding fee is usually 2.3%. By rolling it into your loan balance, that's $6,900 less that you have to save up for. But don't celebrate too soon!
We mentioned earlier that closing costs are usually just a one-time expense, with some exceptions. Well, rolling closing costs into your loan is one of them.
When you roll in your funding fee, your loan balance increases. Since the same interest rate is now being applied to a bigger balance, both your monthly mortgage payment and the total lifetime interest you'll end up paying will increase.
Basically, you're saving money up front by paying more later.
However, this can still be a good tradeoff, especially if affording closing costs is the only thing holding you back from purchasing a home.
Getting a "no closing cost" loan
While it is possible to get a VA home loan that doesn't require you to bring cash at closing, the name for these types of loans is a bit misleading.
See, no closing costs loans, which are also referred to sometimes as lender credits, doesn't mean the closing costs for the loan are actually waived. Even though you won't be paying money out of pocket at closing, you'll DO pay for them in the form of a higher interest rate.
So, once again, the trade off here is that you pay more each month and in interest over time in order to not have to pay anything when you close your loan. And, because the bump in your rate is covering ALL your closing costs, the extra money paid over time can be significantly higher than if you were to just roll in the funding fee.
Specific closing costs for VA loans
When compared to other types of home loans, VA loans stand out in a lot of ways.
One of these ways is that the VA has specified which closing costs lenders are allowed to charge—and which ones they can't.
In VA terminology, these are called allowable closing costs and non-allowable closing costs.
Allowable closing costs for VA loans
The VA has created a handbook for lenders that outlines exactly which fees a veteran borrower can pay and the circumstances they can pay them in. This handbook is available online, if you're interested in reading the full list.
However, like we said earlier, not all lenders charge the same fees. Just because a fee is allowed doesn't mean a lender will automatically charge it.
So, here's a list of some of the most common allowable closings costs you'll probably encounter on a VA loan:
- 1% flat rate origination fee
- VA appraisal fee
- Credit report fee
- Title fees
- VA funding fee
- Recording fees
- Prepaid insurance and property taxes
- Discount points
- Termite/pest inspection fees required by the Notice of Value
Now, there's something you should know about that 1% origination fee. It's meant to cover everything to do with the processing, underwriting, and origination of your loan. But instead of doing the flat 1% fee, lenders are allowed to itemize those fees and list them separately.
However, the good news is that if a lender chooses to itemize their fees, the total still can't add up to more than 1% of the loan amount.
Non-allowable closing costs for VA loans
- Attorney fees charged by the lender
- Builders' HUD/FHA inspection fees
- Appraisals not requested by the buyer or seller
- Real estate agent commissions
- Brokerage fees
- Charges from a lender or seller-requested Reconsideration of Value
- Flood zone determinations made by the lender or a VA appraiser
Now, if the lender DOES charge the flat 1% origination fee instead of itemizing them, then the list of non-allowable fees gets even longer. Fees that cannot be charged to the veteran-borrower if the 1% origination fee is charged include:
- Inspection fees not required by the Notice of Value
- Settlement, escrow, or closing fees
- Document preparation fees
- Underwriting or processing fees
- Application fees
- Non-title related attorney fees
- Notary fees
- Rate lock fees
- Commitment fees
Now, this may still not be a full, comprehensive list of every possible non-allowable fee. So, if there's a fee you're not sure about, you can always ask your loan officer what it is, why it's there, and if it's a VA-allowable fee.
And just to plug it one more time, if you're shopping around for lenders, you can always ask them for a second opinion.
VA loans help you save on closing costs
When it comes to lower closing costs, VA loans are hard to beat. Thanks to the VA's rules for allowable and non-allowable fees, lenders are limited on how much they can charge you. That means thousands of dollars in savings—and the ability to get into a home sooner.
