5 Ways to Pay Less in Closing Costs on a VA Loan

If you’ve started the mortgage process, you probably know that closing costs can be expensive, equaling around 1–5% of the home price. That’s why many veterans looking to get a VA loan wonder if there’s an option with no closing costs.

The good news is that there are multiple ways for veterans to lessen or even eliminate VA loan closing costs on their home loan, some of which are listed below:

5 Ways to Reduce Out-of-Pocket Closing Costs. 1. Roll some closing costs into the loan. 2. Use closing cost assistance for veterans. 3. Negotiate with the seller for them to pay closing costs 4. Get lender credits to cover the costs. 5. Look at VA loans with no closing costs.

Keep reading to learn how to make each of these tips a reality for your home loan.

1. Roll Some VA Closing Costs into the Loan

One of the best ways to reduce VA loan closing costs is to roll the VA funding fee into the loan. This fee is typically equal to 1.25–3.3% of the loan amount, so including it in your mortgage can save you a substantial amount at closing.

Most veterans choose to roll the fee into the loan to save on upfront costs, though some do opt to pay it out of pocket.

It’s important to keep in mind that rolling any closing costs into the loan will require you to pay more in interest over the long run. This is because you’re increasing the loan amount, which in turn increases the amount of interest you’ll pay.

However, this option is helpful for those who may not have enough money saved to pay the funding fee upfront or who don’t want to spend their savings and would rather include the fee as part of the loan amount.

How Much Will My Interest Go Up If I Roll the VA Funding Fee into the Loan?

Here’s a simplified example to give you a sense for how costs could change if you included the VA funding fee in your loan.

Let’s say you’re getting a $200,000 mortgage. You put 5% down and are an active-duty veteran, so your VA funding fee amount is 1.25% of the loan, which equals $3,000.

If you pay the fee upfront, you won’t have to pay interest on the fee amount. You’d end up paying $6,500 in interest on the mortgage. In total, you’d pay $209,500 for the mortgage amount, interest, and funding fee over the life of the loan.

However, if you roll the fee into the loan, you’d pay $6,597.50 in interest, which means the total amount you’d pay for the loan would be $209,597.50.

As you can see, the interest added by the VA funding fee isn’t much. You’d only pay $97.50 in interest on the fee over the long run.

Essentially, in this example, you’d have to decide whether it’s worth paying an additional $97.50 over the life of the loan to avoid paying the $3,000 funding fee upfront.

For many veterans, paying slightly more in interest to avoid the significant upfront cost is worth it. However, the best option for you depends on your individual situation.

2. Use Closing Cost Assistance for Veterans

Depending on your area, there may be programs and grants available to help veterans reach their goal of homeownership.

According to VA loan expert Maurice Navarro, these programs usually vary locally, sometimes differing even between counties. You can visit your local VA office to learn more about what programs are available in your area and for your specific situation.

You can also ask your VA lender if they’re aware of any veteran homeownership assistance programs you might be able to apply for. Look for lenders that specialize in VA loans, like us at Low VA Rates, so you’re getting information from experts that are more familiar with opportunities available for veterans.

3. Negotiate with the Seller to Have Them Pay Closing Costs

Perhaps one of the best ways to reduce VA closing costs is to ask for the seller to pay for them. As part of the homebuying negotiations, it’s perfectly acceptable to ask for any/all costs to be paid by the seller.

The closing costs a seller agrees to pay are called concessions, and they can include the VA funding fee, property taxes and insurance, and other specified costs.

Did You Know?
According to the VA, seller concessions can equal up to 4% of the loan amount.

Whether the seller will agree to pay for these costs depends on multiple factors, like how long the home has been on the market or what kind of housing market you’re in. If you’re in a buyer’s market, you’ll likely find sellers who are more willing to pay some closing costs.

It’s important to know that no seller is required to pay closing costs, but it’s still in your best interest to make sure you ask.

Learn more details about seller concessions on VA loans in the video below.

 4. Get Lender Credits to Cover the Costs

What Are Lender Credits?
With lender credits, lenders lower your closing cost amount. In exchange, you accept a higher interest rate and potentially pay certain fees.

Another helpful way to reduce upfront costs on a VA loan is to ask your lender for lender credits.

Like with most lender-buyer agreements that lower closing costs, your interest will usually increase with this option. A higher interest rate helps cover the cost your lender is paying for you at closing. It spreads it out over a longer period of time, however, making it more manageable for many borrowers.

Also similar to other closing cost-saving options, you’ll want to consider whether the additional money paid in interest over the long run is worth the upfront savings.

5. Explore VA Loans with “No Closing Costs”

If you’re looking for a “no closing cost” VA loan, the VA IRRRL is a great option if you already have a VA loan and want to refinance. With the IRRRL, you’re able to roll all of the closing costs into the loan.

Similar to what happens when you roll the VA Funding Fee into a loan, this option increases the balance of your loan, but allows you to pay less upfront.

You’ll want to remember that there are no true “no closing cost” VA loans, since you’ll still need to pay for the costs (plus interest) over the life of the loan.

However, any costs you can roll into the loan will mean you pay less money out-of-pocket on your home purchase, which is especially useful for veterans who can’t afford a large upfront payment or would like to keep their money in savings or use it for investments.

Talk to a VA lender to learn about your options for rolling closing costs into your VA loan.

In the meantime, watch Eric Kandell, president of Low VA Rates and VA loan expert, discuss how this works in the video below.

 

FAQ; No Cost Loan| Low VA Rates

 

Can I Do a No-Cost-at-Closing Loan?

No Cost Loans

Wouldn’t it be wonderful if you could just say, “I’d rather not pay for any closing costs.” and your lender just shrugged and said, “Alright, then. Don’t worry about it”? The good news is that you can totally do that! The bad news is that it’s not as simple as just getting your closing costs waived. You have a few options as far as finding a way to not pay your closing costs. The first option is to work with your seller on some concessions, and the second is to work with your lender on negotiating a higher interest rate in exchange for them covering your closing costs. You also need to consider when it’s a smart idea to do so and when it’s best to just stomach the cost.

 

The VA permits the seller (or any other party, for that matter) to pay as much on behalf of the borrower as they so desire. In other words, a seller can completely pay for a VA borrowers closing cost if the buyer can convince the seller to do so. Seller concessions of this nature are actually fairly common. Sellers often just want to get enough out of their home to supplement their down payment on their new home, and they are often willing to miss out on more cash above and beyond that amount in exchange for being able to sell the home quicker. In many cases, the seller has already moved and is under serious strain trying to make two mortgage payments. If you are using a real estate agent, see if he or she has tried negotiating for that concession, and if not, see if it’s an option. Having the seller pay for closing costs is free money for you with no penalty, and it’s the most advantageous way to get a loan with no upfront cost. It’s not the only way, however.

 

VA-approved lenders will almost always be willing to negotiate a higher interest rate in exchange for lower closing costs. Some lenders, including Low VA Rates, are willing to go as far as it takes to completely remove closing costs. It doesn’t generally take as far as you might think. Since getting your closing costs taken out makes your interest rate go higher, you’ll obviously feel the bite of that decision over time, and therefore we generally recommend that you don’t eliminate closing costs unless you are planning on moving or refinancing within 12-18 months. You certainly don’t have to do so, but once you’ve gone longer than 18 months, the increased amount of interest that you’ll be paying is enough that it would have been far better to just pay the upfront closing costs.

Finding your Financial Freedom

Obviously, in a perfect world, you’d have all the money you needed to pay for closing costs with no problem. As it stands, you’re usually better off paying as much of closing costs as you can, and only taking as high of an interest rate as you absolutely have to to get closing costs down to where you can afford them. You may be surprised, however, at the tricks we can pull out of our hats here at Low VA Rates to get you very good loan terms and not have you pay any closing costs. If closing costs are something you’re worried about, and you truly need to do a no cost loan, definitely talk to us about it and see what options we can offer you.

 

Everything above has to do with a new purchase loan, but you may be pleasantly surprised to learn that the VA’s streamline refinance option, the Interest Rate Reduction Refinance Loan (IRRRL), can be done with zero money down, because the VA allows you to roll all of the closing costs (including the VA funding fee) into the loan amount. In this way, you can get your VA loan with no money down now by getting a higher interest rate, then refinance with an IRRRL in a year from now with no penalty for rolling closing costs into the loan and get a much better interest rate. Feel free to bring any questions up with us here at Low VA Rates.

 

FAQ VA Loan Closing Cost

Are There Closing Costs on a VA Loan?

 

Short answer: Yes. But you probably want more information than that, so we’ll cover some basic information on what closing costs can exist on a VA loan. We’ll talk about closing costs that the borrower is allowed to pay, and closing costs that the borrower is not allowed to pay. The VA does its best to protect its borrowers from unethical practices and overcharging, while still keeping up with industry standards and making VA loans attractive and profitable for lenders.Are There Closing Costs on a VA Loan?

 

The first item that will be included in closing costs for any VA loan is the VA funding fee. The purpose of the VA funding fee is to defray the cost of the VA loan program to taxpayers. With only a few exceptions, every VA-eligible borrower must pay the VA funding fee at closing. The funding fee varies based on whether the borrower served in the regular military or the Guard/Reserves, as well as how much of a down payment was made on the loan. At the moment, the highest the funding can get for a first-time use is 2.4%, and the highest for a subsequent use is 3.3%. The lowest for both first-time use and subsequent use is 1.25%. While the funding fee can either be paid in cash or financed, it is due in its entirety at the time of closing.

 

For a veteran who served in the regular military and made a 5% down payment, the funding fee would be 1.5%. On a $200,000 loan, that would be $3,000. In addition to the funding fee, the lender is also permitted to charge a 1% flat fee. In the case of this veteran, that fee would be $2,000. The veteran is also permitted to pay “reasonable” discount points as desired, and a set of itemized fees and charges, as long as those fees and charges are a reasonable amount. The VA provides a simple chart that lists and describes the allowable fees that a VA borrower can be charged:

Charge Description
  • Appraisal and Compliance Inspections
  • The veteran can pay the fee of a VA appraiser and VA compliance inspectors
  • The veteran can also pay for a second appraisal if he or she is requesting reconsideration of value
  • The veteran cannot pay for an appraisal requested by the lender or seller for reconsideration of value.
  • The veteran cannot pay for appraisals requested by parties other than the veteran or lender.
  • Recording Fees
The veteran can pay for recording fees and recording taxes or other charges incident to recordation.
  • Credit Report
The veteran can pay for the credit report obtained by the lender.For Automated Underwriting cases, the veteran may pay the evaluation fee of $50 in lieu of the charge for a credit report.

For “Refer” cases, the veteran may also pay the charge for a merged credit report, if required.

  • Prepaid Items
The veteran can pay that portion of taxes, assessments, and similar items for the current year chargeable to the borrower and the initial deposit for the tax and insurance account.
  • Hazard Insurance
The veteran can pay the required hazard insurance premium. This includes flood insurance, if required.
  • Flood Zone Determination
The veteran can pay the actual amount charged for a determination of whether a property is in a special flood hazard area, if made by a third party who guarantees the accuracy of the determination.
The veteran can pay for a charge for a life-of-the-loan flood determination service purchased at the time of loan origination.
A fee may not be charged for a flood zone determination made by the lender or a VA appraiser.
  • Survey
The veteran can pay a charge for a survey, if required by the lender or veteran. Any charge for a survey in connection with a condominium loan must have the prior approval of VA.
  • Title Examination and Title Insurance
The veteran may pay a fee for title examination and title insurance, if any.
If the lender decides that an environmental protection lien endorsement to a title policy is needed, the cost of the endorsement may be charged to the veteran.
  • Special Mailing Fees for Refinancing Loans
For refinancing loans only, the veteran can pay charges for Federal Express, Express Mail, or a similar service when the saved per diem interest cost to the veteran will exceed the cost of the special handling.
  • VA Funding Fee
Unless exempt, each veteran must pay a funding fee to VA.
  • Mortgage Electronic Registration System Fee
The veteran may pay a fee for MERS. MERS is a one-time fee for the purpose of electronically tracking the ownership of the beneficial interest in a loan and its servicing rights.
  • Other Fees Authorized by VA
Additional fees attributable to local variances  may be charged to the veteran only if specifically authorized by VA. The lender may submit a written request to the Regional Loan Center for approval if the fee is normally paid by the borrower in a particular jurisdiction and considered reasonable and customary in the jurisdiction.

FAQ; Why Veterans Pay Origination Fees

Why Do Veterans Pay An Origination Fee?

I was on the phone the other day with a veteran borrower and they posed a great question, “Why do veterans have to pay an origination fee?”  I thought, hey that is a good question and I bet others have asked that very thing.  Veterans have access to the best mortgage financing available in America today, bar none.  The VA allows veterans to finance 100% of the home purchase price.  No where else can you find such a program.

With interest rates at 50 year record lows, many veteran families are taking advantage of the interet rate reduction loan offered by the VA.  Of course any time you refinance your loan there are going to be costs.  One of those costs is the origination fee.  It is almost universally 1% of the loan amount, or one point, as many call it.

Veterans pay this fee as part of the purchase or refinance and there are several reasons why.

1.  As a VA IRRL is processed it will be touched by nearly 20 people, from start to finish.  From processing, to the VA, to the current lender to the new servicer, the title company, the loan officer and many other in between.  There is work done by each of these parties and each party will receive compensation for the work done.

2. It is a fee for services completed– just like your taxes, or some other professional you trust, a lawyer or accountant.  You expect the refinance to be done correctly, quickly and completely,  as with any licensed professional.

3.There are a number of costs while processing a VA loan that the VA does not allow the veteran to pay for.  The largest of which is the underwriting fee charged by the new loan company.  It can be as much as $1000 and so any unallowable fee that is incurred as part of the refi must be paid out of that origination fee.

4.Finally there are some circumstances in which it is possible for the veteran not to incur an origination fee, or half of one etc.  Commonly when a veteran or other home owner who is looking to refinance wants to do a “low-cost” mortgage.  The lender will reduce their origination fee if the banks will pay for the refiance costs.  The banks do this by having a higher interest rate then what is available and will make up the difference on the loan.  This is not usually a great option because the rates on these “low-cost” loans can be up to 1.5% higher then the lowest rate that is being offered.  For example, 4.5% is a rate at which we have been refinances veterans for alomst 3 months.  You can do a “low-cost” loan at 6% but what good is that if you are already at a 5.5%.

Finally, you get what you pay for is what my Dad always said.  Over the years his words of wisdom have become more true to me.   See you around..

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*Annual savings calculator based on 2015 monthly average savings extrapolated year-to-date.