VA Streamline Closing Costs Explained

Depending where you live or the type of loan you’re taking out, you may be able to control how many closing costs you’ll have to deal with, how you’ll deal with them, and when. Find out the best way to minimize those closing costs and keep more money in your pocket – even after closing! 

What Are VA Streamline Closing Costs?VA IRRRL Closing Costs

Closing costs include any fees involved in obtaining and finalizing your streamline loan—basically, how much the whole process costs, from your very first meeting with your lender to the moment you get the keys to your new house.

We’ll take you through some examples of closing costs so you can get a better idea of what to expect. Though this is not a comprehensive list, it covers most of the common fees, many of which may be known by other names.

Prepaid Finance Charges (PFC) vs. Paid Outside Closing (POC)

You may notice in your paperwork that some closing costs are listed under PFC or POC. POC payments are paid prior to closing, like an appraisal fee. PFC charges include any fees or costs having to do with the loan process itself, such as prepaid taxes, prepaid insurance, title searches, or administrative charges.

Discount Points

Discount points serve as fees you can pay to buy-down your mortgage rate. One discount point is equal to 1 percent of the loan amount. Each point used can potentially lower your interest rate by 1/8 to a quarter. For example, if you have a loan of $300,000, each of your discount points would cost $3,000. If your interest rate is 5 percent, and each point used lowers your rate by a quarter amount, then buying two points for $6,000 will lower your interest rate to 4.5%. The cap for discount points is 25, and you can always opt for a zero-point loan.

Origination Fees

Origination fees are pretty self-explanatory; they pay for the administrative process of starting a loan, such as underwriting and processing. This fee cannot be more than 1 percent of the loan.

Credit Report Fees

These fees pay for a credit report, which can cost up to $30.

Appraisal Fees

Typically, your lender will hire an appraiser to evaluate the house and the property surrounding it. The appraisal fee can be around $300.

Included in the appraisal process are hazard and flood zone determinations, as well as environmental endorsements. These will cost money, too. Hazard insurance may or may not be required in your state, but some states (like California) require a hazards disclosure report. This report informs the buyer of any potential environmental hazards near the property they are buying.

Like hazard insurance, environmental endorsements may not be required, but certain states or lenders may want to make sure the location of the property has been declared environmentally safe before proceeding with the loan process.

Flood zone determination is usually performed by a third party. They determine whether your home is located near or in a flood zone and whether or not you’ll need to buy flood insurance.

Title Examination Fees

This fee can cost up to $300 and is charged by a third party, usually an attorney in charge of closing. The attorney inspects the title and makes sure there are no mistakes or oversights, such as breaks in the chain of title or unsatisfied liens of mortgages.

Escrow Fees

Escrow fees are paid to the third party who carried out the closing, such as title companies, attorneys, or escrow companies. Some states don’t require real estate attorneys to be present during closing, but normally some form of third party will oversee the closing and make sure everything is in order.

When you start your escrow account, lenders will require a deposit. Escrow payments can be annual or semiannual, or you can roll them into the loan and pay them in monthly installments.

VA Funding Fee

VA funding fees of 0.5 percent apply to every VA refinance or purchase loan and are intended to help other veterans. The proceeds of this fee go to the Department of Veterans Affairs, and the VA uses this money to compensate for losses on defaulted VA loans. If you are a veteran under VA compensation or if you have disabilities from service, it is possible to be exempt or partially exempt from this funding fee.

VA Streamline Loan and Closing CostsChoosing a VA Streamline


If you’ve crunched the numbers and a VA Streamline seems right for you, then we’re here to help. Our loan officers at Low VA Rates are ready and reliable when it comes to setting you up with a great VA loan at an extremely low rate. We work hard with our veterans to mitigate the pile-up of closing costs and make sure no unforeseen fees obscure the path to homeownership. You’ve worked hard for us, so we promise to work hard for you. Visit
our site to learn more.

FAQ; Closing Costs VA Loan

Are There Closing Costs When Buying a Home with a VA Loan?

 

Yes, there are. The VA has strict guidelines on how much the lender can charge for closing costs, however. There are differences in what can be charged for closing costs depending on what type of VA loan you’re getting – new purchase, cash-out refinance, or streamline refinance. We’ll cover some general information about closing costs on VA loans in this article. For more specific information about closing costs on a cash-out refinance or Interest Rate Reduction Refinance Loan, check out the articles written for the Frequently Asked Questions about them. As mentioned, there will be closing costs associated with your VA loan.

 

Closing costs that you as the borrower may be faced with fall under 3 categories: fees that can be charged regardless of whether the lender chooses to charge a 1% origination fee, fees that can only be charged if the lender does not charge a 1% origination fee, and fees that the lender is not allowed to charge the borrower no matter what. It’s important to know what those fees are and what the lender is charging you for two reasons: first, you want to have realistic expectations of what’s coming your way, and second, you want to be your own first line of defense against a lender charging you more than they should. So, here is a list of fees and charges that can be charged no matter what:

 

  • Appraisal fee – per allowable maximum appraisal fee schedule for that state
  • Compliance inspection – only if required by the NOV
  • Credit report – in most cases it should not exceed $50
  • Recording fees, taxes and stamps
  • Prorated tax and insurance escrow
  • Hazard insurance – if it was not paid directly out of pocket by veteran outside closing
  • Survey and plot plan
  • Title insurance, title policy, title exam, title search, title endorsement and any fees
  • required to prepare title work
  • Environmental protection lien endorsement
  • 1% origination fee
  • VA funding fee
  • Discount points
  • Closing protection letter – sometimes just listed as “CPL” (should not exceed $35, except
  • in Pennsylvania it is $75)
  • Interthinx DISSCO fraud protection report
  • MERS fee
  • Well and Septic inspection fees
  • Express mail fees (only for cashout refinances and IRRRL’s) – actual cost should be reasonable. If not question it (over $50 should be questioned – ask for actual invoice)

 

The lender has a choice; he or she can charge a flat 1% origination fee in addition to the above charges, or they can itemize any of the charges below to make up the rest of their fee. You’ll want to make sure that you’re clear on what your lender is planning on doing for your loan. Here is a list of fees they can charge you for closing costs if they do not take a 1% origination fee:

Lenders Approval

  • Lender’s appraisal – the veteran can only be charged for 1 appraisal unless VA deemed
  • a second appraisal mandatory
  • Lender’s inspection – if it is not required on the appraisal/NOV, it can not be charged to
  • the veteran
  • Settlement fee, escrow fee, closing fee
  • Document preparation fee
  • Underwriting fee
  • Processing fee
  • Application fee – a veteran can be charged up front the cost of the appraisal and credit
  • report to ensure the loan officer is not stuck with those fees if the veteran walks away
  • from the deal.
  • Pest inspection fee
  • Attorney fees if for something other than title work
  • Assignment fee
  • Copying fee
  • E-mail fee
  • Fax fee
  • Photographs
  • Postage fees if not a cashout refinance or IRRRL
  • Amortization schedule
  • Notary fee
  • Commitment fee
  • Trustee fee
  • Truth in lending fee
  • Mortgage broker fee
  • Tax service fee

 

Now, while the above list is quite long, it does not necessarily cover everything. Your lender may charge a fee that is not listed above and that does not necessarily mean that you’re being cheated. If this happens, you should check with your city, county, and state governments to see if the fee is mandated by any of those bodies. If it is not, and it is not on the allowable fees list, chances are you shouldn’t be being charged it. Lastly, here is the relatively short list of fees that come up often enough that the VA has added them to this list of fees that are never permitted:

VA Loan Thumbs Up

  • Termite/Pest inspection
  • Attorney fee charged as a benefit to the lender
  • Mortgage broker fee
  • Realtor Commission
  • Prepayment penalties
  • HUD/FHA inspection fees for builders

FAQ; What are Closing Costs?

What Are the Closing Costs?

Mortgage 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.

 

Is There a No-Cost-at-Closing or “Free” VA loan?

Trying to understand if a loan is Free or No Cost or a No Point loan is very confusing, can get your hopes up or flat out leave you frustrated  Here at Low VA Rates we find it best to just educate and empower the consumer (veteran) and then they will normally choose us anyway. Here is a guide that may help educate you on the differences between a Free Loan, a No Cost Loan and a Loan with points. We hope you find this it useful and empowering.

Feel free to check out our video here as well.

The VA Funding Fee Demystified and Explained Part 2

Deciphering the VA Lender’s Handbook Chapter 8 Part 6

How the VA Funding Fee worksIn the last article we covered how you and the lender work together to determine whether you are exempt from the funding fee, as well as what to do in the event that you could be exempt but aren’t able to have your exempt status confirmed until after the fact. If you’re looking for information on how the funding fee works and the process you’ll go through in relation to the funding fee, you’ll want to read that article. This article is going to be all about numbers; how much will the funding fee cost, what number is the percentage calculated off of, and how many days the lender has to remit payment of the funding fee to the VA.

 

For all VA loans except for IRRRLs (streamline refinances), a certain percentage calculated from the tables in Chapter 8 of the VA Lender’s Handbook is applied to the loan amount. Some good news for those who are planning to use loan proceeds to pay for the Funding Fee: the percentage is calculated off the loan amount before the cost of the funding fee is added to it (if you think about it for a bit, it becomes clear why). IRRRLs are different; to calculate the funding fee on an IRRRL, the lender completes the VA Form 26-8923. For most loans, however, the lender will be using the tables in Chapter 8, which I have included in this article. Quick note – for joint loans there are some special instructions for calculating the Funding Fee. We went over those in Chapter 7.

 

So, when the lender is calculating the Funding Fee, he or she will look a lot at your Certificate of Eligibility. The first thing they will look for is whether you are eligible for benefits because of service in the regular military or through the Reserve/Guard. For a Reservist/Guard, the COE will be buff-colored rather than green, and will have the following notation, “RESERVES/NATIONAL GUARD – INCREASED FUNDING FEE”. The second thing the lender needs to know is whether this is a first-time use of the veteran’s VA loan benefits or a subsequent use. The entitlement code on the COE tells the lender this. A “5” indicates a subsequent use. Next, the lender needs to apply what kind of loan is being taken out: new purchase, refinance, or streamline refinance. Last, the lender needs to take into account whether the veteran is making a down payment, and how much of one is being made. With that information, the lender can locate the correct percentage using the below tables.

 

For New purchase and Construction loans:

Type of Veteran Downpayment Percentage for First time Use Percentage for Subsequent use
Regular

Military

None

5% or more

10% or more

2.15%

1.50%

1.25%

3.3%

1.50%

1.25%

Reserves/National Guard None

5% or more

10% or more

2.4%

1.75%

1.5%

3.3%

1.75%

1.5%

For Cash-out Refinancing Loans:

Type of Veteran Percentage for First Time Use Percentage for Subsequent Use
Regular Military 2.15% 3.3%
Reserves/National Guard 2.4% 3.3%

Calculation VA Loan RatesAs you can see, making a down payment makes a big difference in the amount of funding fee you are charged, regardless of whether you served in the regular military or the Reserve/Guard. Considering that making a down payment also lowers your principal and saves you thousands of dollars in interest over the life of the loan, making a down payment is the best financial decision if you are able to afford it. Even if you don’t make a down payment, the Funding Fee is very low compared to the mortgage insurance premiums you would be paying through any other loan program for paying little or no down payment.

 

Lenders must get the Funding Fee payment to the VA within 15 calendar days of loan closing. If you are paying the funding fee out-of-pocket, you’ll be asked for a cashier’s check at the time of closing. If you are paying the funding fee out of loan proceeds, your lender will explain how it will work. In the event that a refund is due to the veteran (either the veteran was exempt or was overcharged due to a miscalculation), the lender will either send you a check (if you paid the Funding Fee upfront) or apply the refund to your loan balance (if you paid it out of loan proceeds).

 

The VA Funding Fee Demystified and Explained Part 1

Deciphering the VA Lender’s Handbook Chapter 8 Part 5

 

Explaining the VA Funding FeeThis article and the one following it will both be dedicated to explaining the VA funding fee in detail so that you as a borrower will know what it is, what it’s for, why it exists, and most importantly, how and when you will pay it and what the lender’s role in facilitating that payment is. The lender is required to verify your veteran status to see whether you are exempt from the funding fee, determine what amount you are required to pay (if not exempt), collect the required fee from you at closing, send the fee to the VA in a timely manner, get a hard-copy of proof that the funding fee has been paid, and submit that proof to the VA along with the packet containing the information on the newly-closed loan. If the borrower has elected to pay the funding fee from loan proceeds, the cash will not be due from the borrower upfront, but will still be paid by the lender.

 

We’re going to go through all the steps that the lender is required to take, and talk about how they relate to you as the borrower. First is determining who is exempt from the funding fee and who is not. A general rule of thumb is that those currently receiving or eligible to receive disability compensation of at least 10% are exempt from the funding fee along with surviving spouses of veterans who died in service or due to service-connected disabilities. The Lender’s Handbook gives us the specifics:

 

• Veterans receiving VA compensation for service-connected disabilities.

• Veterans who would be entitled to receive compensation for service connected

disabilities if they did not receive retirement pay.

• Veterans who are rated by VA as eligible to receive compensation as a

result of pre-discharge disability examination and rating or on the basis of a

pre-discharge review of existing medical evidence (including service

medical and treatment records) that results in issuance of a memorandum

• Veterans entitled to receive compensation, but who are not presently in

receipt because they are on active duty.

• Surviving spouses of veterans who died in service or from service connected

disabilities (whether or not such surviving spouses are veterans

with their own entitlement and whether or not they are using their own

entitlement on the loan).

 

When a lender is working to verify whether you are exempt, they have a few options for things they can do. The lender can retrieve a completed and signed VA Form 26-8937 which indicates the borrower’s exempt status (this is the most common), or for veterans who elected retirement pay instead of VA compensation, a copy of the original VA notification of disability rating and proof of the retirement income the veteran is receiving will provide sufficient verification. For surviving spouses, the Certificate of Eligibility he or she receives will denote their status as an unmarried surviving spouse, who are exempt from the funding fee. If the lender is still unable to properly verify that the borrower is exempt after reviewing the appropriate documents, they must work directly with the VA on verification.
As a borrower, if you might be eligible for disability but have not been examined or applied for it, you can make life on yourself and your lender much easier by applying for it beforehand. Even if you decline the payments, being eligible for disability saves you thousands of dollars by exempting you from the funding fee. The lender is required to submit the documentation used to verify exempt status along with the loan packet, so be prepared to provide the lender a copy of anything they need. In cases where verification of exempt status cannot be done before loan closing, the funding fee must be charged as if the borrower was not exempt. If you are claiming exempt status but not able to verify it, the lender is required to include that information in the packet. The VA will make the final decision, and theoretically they will notify you either way. However, you should be prepared to follow-up with the VA, especially if your disability claim is still pending at the time of loan closing. You will want to contact your VA RLC to request a refund of the funding fee if they determine that you are eligible for disability compensation after-the-fact.

IRRRL Closing Costs – How Much Are They?

Understanding IRRRL Closing Costs

What are the Closing Costs on an IRRRL?

Here at Low VA Rates we often get the question, are there IRRRL closing costs? Unfortunately, the bad news is that there are closing costs when it comes to refinancing your home. However, as we’ll explain in a bit, the source of that misconception is actually one of the things that make the VA streamline refinance program such a great deal for the borrower. Any time you work through a lender to obtain a loan, there will be closing costs, whether you have to pay them or the seller offers to pay them for you. In the case of a VA streamline, or IRRRL, there is no seller, so you will definitely have to pay the closing costs on your new loan. However, that’s where the bad news ends. Everything else is good news – both in the things that can be included in closing costs and your options for paying closing costs.

What Closing Costs Can Be Added to a VA IRRRL?

Lenders HandbookThe VA lender’s handbook says that, in regards to IRRRLs, closing costs can include the VA funding fee (unless you are exempt – most borrowers are not, but speak with a VA-approved loan officer to find out if you are), and “any allowable fees and charges…including the lender’s flat charge”. These allowable fees and charges are listed in our “Are there Closing Costs on a VA Loan?” post. While the lender is allowed to charge for any of the things on that list if they are provided, not all of them are required on an IRRRL. For example, an official VA appraisal of the home is not required in an IRRRL, and therefore you won’t be charged for it. Also, your income and employment do not need to be evaluated and verified again, so there should not appear any charges for those things. All in all, the simplified, streamlined process of the VA IRRRL actually makes it cheaper as well. But hey, we’re not done with the good news yet.

Not only will the charge for closing costs be smaller on an IRRRL than for a standard refinance or new purchase loan, but you can actually finance every dime of closing costs on an IRRRL into the new loan. In other words, you can get an IRRRL with truly no money down whatsoever. The VA instituted this policy in order to open up the benefits of the IRRRL to more veterans – especially the ones who need it most. Since those who are in the most need of better mortgage terms also often do not have very much money saved to cover closing costs, those closing costs can be a very real barrier to a veteran improving their financial situation. The VA recognizes this and has done their best to make the benefits of the IRRRL available to as many veterans as possible.

But wait, there’s more… The VA will also allow you to purchase and finance two discount points into the loan amount. Buying discount points from the lender means you pay the lender a certain amount of cash in exchange for a lower interest rate. If you want to understand discount points better, give a VA-approved lender a call and ask them your questions. They will be able to explain it better in context than we can here. You can purchase more than two discount points on an IRRRL, but you can only roll the cost of two into the loan amount. Allowing you to roll discount points into the loan amount at all is extremely generous, and stopping it at two protects the lenders from shouldering too much risk without enough return. The VA does its best to make its loan program attractive to both borrowers and lenders.

How to Calculate Closing Costs on a VA IRRRL

A word of caution: it is wonderful to be able to roll closing costs into the loan amount. However, remember that if you don’t pay them upfront, you are going to be charged interest on them right along with the rest of the loan. An extra $5k-10k on your mortgage may not seem like much, but the effect it has on your amortization schedule and the total amount of interest paid can be unpleasant. If you have the ability to pay your closing costs upfront without putting yourself in too much of a tight spot, it is usually the best call to do so. Just like paying cash for a house saves you money in interest vs. financing it with a lender, paying cash for your closing costs instead of financing them also saves you money.

For your reference, here is the relevant portion in the VA Lender’s Handbook about closing costs on an IRRRL:

The following fees and charges may be included in an IRRRL:

  • the VA funding fee, and
  • any allowable fees and charges discussed in section 2 of chapter 8; such as all allowable closing costs, including the lender’s flat charge.

However, There Is One LimitationAvoiding Hidden Closing Costs

While the borrower may pay any reasonable amount of discount points in cash, only up to two discount points can be included in the loan amount.

Although VA does not require an appraisal or credit underwriting on IRRRLs, any customary and reasonable credit report or appraisal expense incurred by a lender to satisfy its lending requirements may be charged to the borrower and included in the loan.

The lender may also set the interest rate on the new loan high enough to enable the lender to pay all closing costs, as long as the requirements for lower interest rate and payments (or one of the exceptions to those requirements) are met.

For IRRRLs to refinance loans 30 days or more past due (which must be submitted for prior approval), the following can be included in the new loan:

  • late payments and late charges on the old loan, and
  • reasonable costs if legal action to terminate the old loan has commenced.

Seller Concessions – What’s allowed?

Deciphering the VA Lender’s Handbook Chapter 8 Part 3

 

Believe it or not, the VA puts a limit on just how generous the seller can be with handing out value to the borrower. Why? Because sellers will sometimes use excessive concessions to entice a borrower to an unfavorable mortgage or one that the borrower can’t really afford. While we all understand what seller concessions are, to clarify exactly what the VA means by ‘seller concessions’, we’ll use the following definition from the VA Lender’s Handbook: “ a seller concession is anything of value added to the transaction by the builder What gifts are there at closing.or seller for which the buyer pays nothing additional and which the seller is not customarily expected or required to pay or provide.” This definition will become important as we talk about what is allowed and what is not.

 

Common seller concessions include (but are certainly not limited to) payment of the buyer’s VA funding fee, prepayment of the buyer’s property taxes and insurance, gifts such as a television set or microwave oven, payment of extra points to provide permanent interest rate buydowns, provision of escrowed funds to provide temporary interest rate buydowns, and payoff of credit balances or judgments on behalf of the buyer. According to the VA, a seller paying the buyer’s closing costs or discount points appropriate to the market are not considered a seller concession (this is a good thing, because these things are not factored into the overall value of seller concessions).

 

As mentioned above, issues with builders or sellers offering too much in the way of concessions can cause a veteran to get into a home mortgage that they can’t actually afford; their inability to qualify for the loan can be disguised by the excessive seller concessions, which act as ‘compensating factors’ throughout the underwriting process. Since such a situation would completely defeat the purpose of the VA loan program, the VA places a limit on the overall value that seller concessions can reach. Builders and sellers can still use these concessions as a competitive tool, but for VA borrower they cannot be used to the extreme that can put an unqualified veteran into a mortgage that they cannot afford.

 

The limit that the VA places on seller concessions is very reasonable. The combined value of all the seller concessions on the loan cannot exceed 4% of the reasonable value of the property. From the VA lender’s handbook: “Any seller concession or combination of concessions which exceeds four percent of the established reasonable value of the property is considered excessive, and unacceptable for VA-guaranteed loans.” For example, if the home you are buying is valued at $200k, the builder or seller cannot offer you concessions that are worth more than $8,000. While that may seem like a small amount, you’d be surprised how far $8,000 can go towards seller concessions such as a temporary interest rate buydown or paying the VA funding fee. With the VA funding fee sitting at 2.15% for most borrowers, that leaves quite a bit of leeway for more concessions on the part of the seller should they wish to offer them.

 

This is also where the omission of paying for closing costs and normal discount points as part of seller concessions becomes really important. In the example above, $8,000 is in addition to how much the seller wanted to contribute towards the buyer’s closing costs or normal discount points. For example, right now ‘normal’ discount points could be considered two points on most mortgages. On a $200k home, those two discount points would probably be around $2,000 apiece, with closing costs for the borrower in the several-thousand dollar range as well. The seller could hit $13,000 in value to the buyer without breaking a sweat. Of course, this is just an enumeration of what the VA allows; what a seller is willing to offer is another story entirely. Find out what the seller or builder of a home is willing to offer in the way of concessions, and you might be able to get more money out of them than you originally thought, or than they originally offered. If you have any questions about seller concessions, feel free to contact us here at Low VA Rates.

FAQ; Getting Cash back on a streamline

Can I Get Cash Back at Closing of a Streamline?

 

VA streamlines, also known as Interest Rate Reduction Refinance Loans, or IRRRLs, are interesting beasts. They are quite different from a new purchase loan or even a cash-out refinance. The purpose of an IRRRL is to help a veteran get a lower interest rate on their existing VA loan with as little hassle as possible. Since the purpose of an IRRRL has nothing to do with getting cash back, it doesn’t have a whole lot of options for borrowers looking to get cash for something out of their mortgage. That being said, there are a few ways that you can (sort-of) get cash out as a result of your IRRRL. We’ll cover the ways that you can get cash back on an IRRRL, after we go into detail about what the IRRRL is and why it doesn’t offer a straightforward cash-out option.

Cash Back at Closing

In a normal refinance, a borrower is able to get cash out because they have a certain amount of equity in their home. A borrower is limited in how much cash they can get out by how much equity they have. In order to calculate equity, a VA appraisal needs to be done on the home. Since, in an IRRRL, a VA appraisal does not take place, the value of the home and thus the amount of equity the borrower has in the home cannot be calculated, therefore, since the lender has no way of knowing how much cash the borrower would be eligible to receive, no cash can be given to the borrower at closing. Giving the borrower cash-out on the refinance also increases the loan amount above what the borrower still owes on the home, which brings into question whether the borrower has sufficient income and reliable employment to cover the new loan. In order to determine that, income and employment verification must be done. Since the lack of a VA appraisal and income verification are two of the biggest things that make an IRRRL a “streamline” option, it would defeat the purpose of the IRRRL program to offer cash back.

 

Now, hopefully that makes sense and it is clear that the VA isn’t just saying ‘No’ to cash-out on IRRRLs because they want to. The only ‘real’ way to get cash back on an IRRRL is to not get cash back from the IRRRL itself, but to get an EEM (Energy Efficiency Mortgage) on top of the new loan. You can get an EEM with your IRRRL without complicating the process too much, and an EEM can be made for as much as $6,000. The catch? An EEM can only be used for making energy-efficient improvements to the home that is securing the new loan. The second catch? The VA itself (and most lenders) demands very detailed information on the improvements being made. You will need to get quotes from professionals, price out materials at a home improvement store, and come up with a fairly precise estimate of how much money you need to make the improvements. The changes will need to be analyzed (your lender can help with this) and projected savings on monthly utility bills need to be calculated. If the improvements aren’t going to save more money than they cost within a reasonable time frame, they will not be approved.

 

Money Back From EscrowThere are two other ways you could possibly end up with cash in your pocket at the end of an IRRRL: you might get a small refund for any amounts for which you were overcharged due to a miscalculation or error in the loan process. The VA limits this amount to $500 (if a lender makes more than $500 worth of errors, you may want to consider switching lenders). The other way is a possible refund of your existing escrow balance from the old loan. The only way this amounts to actual cash back is if the balance in your existing escrow was higher than it needed to be (you were paying slightly more into the escrow account than was actually needed to pay insurance and property taxes).

 

So getting cash back on an IRRRL is only an option if you want to get an EEM and make energy-efficient improvements to your house, and it’s a lot of homework to get that.

 

Fees and Charges the Veteran-Borrower Cannot Pay

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.

 

Charges the Borrower Can't PayThe 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.

 

Refinance Closing Costs Allowable Fees for Veterans

Are there Closing Costs on a VA Refinance?

Refinance closing costs

In this article we are going to talk about refinance closing costs: every borrower’s favorite part about getting a loan. Because the six figures you have agreed to pay back at 5% annually-compounded interest over the next 30 years isn’t enough, right? It’s obviously more complicated than that, but that’s how it feels when you first find out that of the $20k you painstakingly saved up over the last 5 years for a down payment, only about half of it will actually go towards the down payment. In a conventional loan, there’s always the worry that the ability to charge closing costs is abused, and only diligent shopping around and lots of research of homework can help you be sure when someone is charging more closing costs than they should be. Like any loan program, VA loans have closing costs: refinances as well as new purchase loans. The VA, however, has policies in place to both protect the veteran borrower and ease the burden of closing costs.

 

Regardless of what type of VA home loan refinance you get, there will be closing costs. However, costs on an Interest Rate Reduction Refinance Loan (IRRRL) are different from the closing costs on a cash-out refinance. Closing costs on a cash-out refinance are very similar to closing costs on a new purchase loan. Closing costs on a cash-out refinance can include prepaid interest, property taxes, and homeowners insurance, discount points on your interest rate, the VA Funding Fee, any homeowners association dues, as well as the cost of getting your credit report, a pest inspection fee, the VA appraisal, origination, underwriting, and processing fees, and the cost of the title exam and insurance. Sounds like a lot (and it is), but the VA makes sure that the borrower only pays for things that are both typical and acceptable for the borrower to be charged. Nothing prevents the borrowers’ closing costs being paid by the seller, but nothing requires the seller to pay for them either.

 

The VA has limits to the overall amount that the lender can charge the borrower, and on a cash-out refinance, the VA Funding Fee can be rolled into the loan amount and not be due upfront. Since the Funding Fee can be as much as 3.3% of the loan amount, this is no small boon to the veteran borrower. Other than the VA Funding Fee, no other closing costs can be rolled into the loan amount, at least on a cash-out refinance. While the actual amount of closing costs charged on your VA loan will vary widely depending on the loan amount, the region you live in, and the lender you choose, you should expect to be measuring it in thousands of dollars, not hundreds.

 

Preparing for closing costs

The IRRRL is a different story. Yes, there are still closing costs on an IRRRL, but the simple and quick nature of the IRRRL cuts out of the costs. You won’t have to worry about the fee for the VA appraisal, you can expect the underwriting and origination fees to be significantly lower, and the real kicker: every dime of closing costs on an IRRRL can be rolled into the loan amount. The purpose of the IRRRL is to provide a streamline refinance option to VA borrowers to enable them to take advantage of lower interest rates, and the VA wants as few obstacles as possible to borrower wanting to take advantage of this benefit. The IRRRL allows you to not only roll the Funding Fee into the loan amount, but all of the allowable fees and charges that the lender asks. But wait, there’s more.

 

On an IRRRL you can also purchase two discount points on your interest rate, and roll that cost into the loan. In other words, you can get a better interest rate without paying a dime right now. You can purchase more discount points if you want, but only two of them can be rolled into the loan amount. One of the biggest advantages of the IRRRL over cash-out refinance is the way closing costs are handled on an IRRRL. You should remember though, that if you decide to roll closing costs into the loan amount, you’ll end up paying more than you would if you had paid them upfront, due to the interest being charged on them.

 

The New 2010 GFE

Well, the time is upon us, 2010 is nearly here and with it, we will see a myriad of changes in mortgage lending and the industry in general.  Most importantly of all these changes are imposed by nearly exclusively by “big brother”.  So only time will tell if they will indeed help the average consumer be more informed and help them to understand what fees they are paying for and whom them went to.  Right from the outset, let me say I don’t think the new GFE is easier to read and understand.  Furthermore, it is at least twice as long as it is now, and it  seems to me and many to be twice as hard to decipher.

Now with that said let me outline just a few of the “highlights” of what the proposed “improvements” are going to require. Thanks, Federal Government, for sticking your nose in yet another industry that doesn’t need it.  They take effect on January 1, 2010.

The GFE provides the potential mortgage applicant with cost details associated with closing the loan.   GFEs have not been standardized and commonly they are different compared state to state and loan type to loan type.   For example in Texas on a VA loan it may not look identical to let’s say a Conventional loan in California.  Even after 7 years in the mortgage industry some are still a jumbled mess.  Also GFEs have been just that, estimates, not an actual amount because it is nearly impossible to know what the actual charges and payoffs etc are going to be on a loan before the loan officer has the opportunity to see the “numbers”.

That seems to be a prevailing factor, that the new GFEs be accurate, or more so.  Normally I would say initial GFE’s have been off by 10-15%.  The new rules will create a standardized, three-page GFE and require that the itemized list of estimated fees and charges be accurate. This is supposed to make it easier for borrowers to understand what charges are involved in their proposed loans.  It will allow for a very small variance in the charges.

These new rules also apply and attempt to standardize the HUD, commonly called the settlement statement.  The list of actual fees and charges the borrower has to pay. The new settlement statement or HUD also will be three pages long and will include a chart on the last page attempting to show the borrower to compare the estimated charges in the GFE with the actual charges paid.

Well, that is the short of it, certainly there is more involved but you get the idea and I hope it will be beneficial to everyone.

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