Understanding who pays the closing costs is paramount for military service members, veterans, and qualifying surviving spouses considering a VA loan.

VA loan closing costs, shedding light on what they entail, how they differ from other mortgages, and who bears the financial responsibility.

 

What Are VA Loan Closing Costs?

Closing costs are inevitable in any mortgage transaction, and VA loans are no exception. These costs encompass various fees for finalizing the mortgage, including home appraisal and title search fees.

The fees are typically paid to the lender for their role in facilitating the loan. VA loan closing costs go beyond the generic term, incorporating specific fees like the VA funding fee, a unique cost associated with VA loans.

 

How Are VA Loan Closing Costs Different?

As with most other process components, VA home loans require different closing costs than other mortgage loans. There is a significant difference between VA closing costs and traditional home buyer costs.

Non-Allowable Fees

VA loan closing costs differ significantly by excluding specific fees that lenders are prohibited from imposing on borrowers. These non-allowable fees include prepayment penalties, settlement charges, and specific attorney fees, providing financial relief and reducing the overall burden on the borrower.

Limited Origination Fee

VA loans limit the origination fee charged by lenders, ensuring borrowers are not subject to exorbitant fees. The origination fee is capped at 1% of the total loan amount, providing transparency and predictability in the borrowing process.

VA Funding Fee

A unique feature of VA loans is that the funding fee is a one-time payment to the Department of Veterans Affairs. This fee supports the continuity of the VA loan program. It varies based on factors such as the type of mortgage, down payment amount, and the borrower's history with VA loans. It represents a percentage of the loan amount, with exemptions for specific eligible individuals, such as those receiving VA compensation for service-related disability.

An example of a VA funding fee illustrates how this unique cost is determined based on various factors in the VA loan process. Let's consider a scenario where a borrower makes their first home purchase using a VA loan and opts for a down payment of less than 5%. In this case, the funding fee percentage would be 2.15% of the total loan amount.

For instance, if the loan amount is $200,000, the funding fee would be approximately $4,300. However, if the borrower decides on a more substantial down payment of 10% or more, the funding fee percentage decreases to 1.25%. So, for the same $200,000 loan amount, the funding fee would now be around $2,500.

Notably, there are exemptions from the funding fee for specific eligible individuals, such as those receiving VA compensation for a service-related disability, surviving spouses of veterans who died in service or from a service-related disability, and recipients of the Purple Heart.

These examples demonstrate the nuanced nature of the VA funding fee, showcasing how down payment amounts and specific eligibility criteria can influence it.

VA Appraisal Fee

VA loans require a specialized appraisal process with fees ranging from $425 to $875. This fee is distinct from standard home purchase appraisals and is included in the closing costs. The VA appraisal ensures compliance with specific standards set by the Department of Veterans Affairs.

Discount Points

VA loans allow borrowers to include discount points in their closing costs, providing an option to pay upfront to lower the interest rate over the life of the loan. Each discount point typically costs 1% of the total loan amount and can be a strategic choice for borrowers seeking to manage their long-term interest expenses.

Termite, Well, and Septic Inspection Fees

Where you live in the country determines whether the VA requires termite inspections. The VA requires a water and well test for the appraised property's private well or septic system. Termite inspection fees can be paid by VA buyers when required. The VA can also pay for any well or septic-related repairs.

Title Insurance Fees

Title insurance aims to protect lenders and homebuyers if liens, defects, or other problems are discovered after closing. Title insurance protects the lender's interest in the property and is usually required by lenders. You should purchase the owner's title insurance to ensure your coverage is also included.

 

Property Taxes and Homeowners Insurance

An escrow account is commonly used to refer to them. Property taxes are levied on an annual basis by your local municipality. The cost of homeowners insurance will also be your responsibility. Closing will require payment of at least a portion of these annual bills.

 

Daily Interest Charges

You pay your mortgage in arrears, which means you pay for the expenses you incurred over the past month rather than in advance. The first mortgage payment will likely be due in November if you close mid-September. You will be charged interest on prepaid interest between the closing date and the end of the month you close. Lenders calculate daily interest as a per-day rate, and prepayment is due at closing.

 

Who Pays Closing Costs On A VA Loan?

Understanding the distribution of closing costs is crucial for all parties involved. In a VA loan scenario, the responsibility is shared among the buyer, seller, and lender. The seller is limited to contributing a maximum of 4% of the total home loan towards closing costs. This encompasses commissions for real estate agents, brokerage fees, and inspection fees.

The buyer shoulders the VA funding fee, loan origination fee, discount points, VA appraisal fee, and other associated costs. Negotiation options are available, allowing the buyer to request seller concessions for specific closing costs.

 

5 FAQs About VA Loan Closing Costs

We'll examine some of the most frequently asked questions about VA loan closing costs.

How much are average VA loan closing costs?

The exact amount varies based on the home and loan details but typically ranges from 3% to 6% of the total loan value.

Can I roll closing costs into my VA loan?

Yes, the VA loan allows certain closing costs, such as the funding fee, to be rolled into the total loan amount, facilitating a more accessible upfront cost.

Are VA loan closing costs tax-deductible?

The VA funding fee portion is likely tax-deductible, but the deduction is contingent on whether the funding fee is rolled into the mortgage.

How does the VA funding fee vary based on the down payment?

The down payment amount influences the funding fee percentage, with larger down payments resulting in lower funding fees.

Can veterans receive assistance with closing costs from Veterans United?

Veterans United offers closing cost assistance loans through affiliated banks, covering closing costs, prepaid items, and discount points up to 0.5%.

 

Bottom Line

Comprehending the intricacies of VA loan closing costs is vital for military service members and veterans navigating homeownership. Mortgage Dove stands ready to assist you as you embark on this journey, offering expertise and guidance to ensure a smooth and informed home-buying experience.