VA loans are known to have lower closing costs compared to conventional mortgages. But how much should you expect to pay at the closing table? And can you roll these costs into the principal balance to keep more cash on hand? Keep reading to learn the answers to these questions and more regarding VA loan closing costs.
The Importance of Understanding VA Loan Closing Costs
It’s vital to understand VA loan closing costs and how they’re calculated. That way, you’ll know what to expect at the closing table and can avoid any surprises. And if you plan to pay closing costs instead of rolling them into the loan, you’ll know how much you need to save to seal the deal.
Breakdown of VA Loan Closing Costs and Other Fees
Here’s a closer look at the closing costs you’ll typically pay when taking out a VA loan.
Loan Origination Fees
Lenders charge this fee to cover the costs associated with processing your loan application. It’s generally 1% of the loan amount, so you’ll pay $3,500 if you take out a $350,000 loan. Before applying, ask your lender about this so you’ll know what to expect.
Appraisal Fees
VA loans require an appraisal by a licensed VA-approved appraiser to determine the market value of the home you’re looking to purchase. The appraisal is essential, as it helps ensure you pay a fair price for the property. It also protects the lender from extending a loan to you for more than the home is worth. Expect to pay between $400 and $900 to cover this expense.
Credit Report Fees
When you apply for a mortgage, the lender will pull copies of your credit reports and mortgage scores from the three major credit bureaus—Experian, TransUnion and Equifax. Your credit history and middle credit score are used to assess your creditworthiness or the likelihood of defaulting on the mortgage. This fee is usually between $30 and $50.
Title Insurance
If issues arise with the property title, this form of coverage kicks in to protect both you and the lender. This means any costs that come up related to old liens or claims against the property will be covered by the title insurance policy. It costs between 0.5% and 1% of the total loan amount.
Recording Fees
There’s also a cost to record the sale of the property you purchase with the local government. The amount you’ll spend varies, depending on where the property is located. It could cost as little as $25 or several hundred dollars.
Survey Fees
The lender may require a survey to confirm property lines before closing on the loan. Survey fees, which usually cost between $300 and $500, minimize disputes regarding where the property begins and ends.
Discount Points
You can purchase discount points if you want to lower your mortgage payments and overall borrowing costs. One point is equivalent to 1% of the total loan amount and reduces your interest rate by 0.25%. You’ll pay these costs at closing or roll them into the loan – the latter option is subject to conditions.
VA Funding Fee
You’ll pay a one-time funding fee between 1.25% and 3.3% to the VA, depending on your down payment amount and how many times you’ve taken out a VA loan. This cost is waived if you’re a veteran with a service-connected disability, a surviving spouse, an active-duty service member with a Purple Heart or a veteran receiving retirement or active-duty pay.
Unique Aspects of VA Loan Closing Costs
The closing costs associated with VA loans differ from what you’ll find with many traditional mortgage programs.
The VA Funding Fee
As previously mentioned, it’s a one-time cost that VA borrowers must pay. It helps fund the VA loan program so it remains sustainable for years to come. Plus, this fee plays a role in the absence of the private mortgage insurance (PMI) requirement for VA loans.
Costs That Can and Cannot Be Charged to Borrowers
As a VA borrower, you’ll be protected from certain fees. The lender can charge you any of the fees mentioned above. However, escrow fees and attorney fees cannot be charged to you.
The Seller’s Contribution to Closing Costs
Per VA guidelines, sellers can contribute up to 4% of the loan amount in closing costs to make the deal more attractive to potential buyers. Eligible costs include the VA funding fee, prepayment of insurance or property taxes, and other gifts like maintenance costs or appliances. So, if you take out a VA loan for $400,000, the seller can contribute up to $16,000 to cover any of these costs.
Reducing and Managing VA Loan Closing Costs
If you’re worried VA loan closing costs will deplete your reserves, consider these tips to soften the blow to your wallet.
VA Loan Closing Cost Limitations
For starters, it’s worth knowing that lenders are subject to limitations on what they can charge for closing costs on VA loans. As previously mentioned, you won’t be on the hook for escrow or attorney fees. And the other caps make the closing costs more manageable.
Negotiation Tips
It’s also worth negotiating closing costs with the lender. Ask the lender for a breakdown of closing costs and a list of services you can shop around for. You may find better deals elsewhere.
Exploring Lender Credits and Seller Concessions
As previously stated, seller concessions are a valuable way to lower your closing costs. But the perks don’t have to stop there. The lender may also be open to providing you with credits to lower your closing costs or roll them into the loan in exchange for a slightly higher interest rate.
Practical Steps for Borrowers Getting a VA Loan
When you’re ready to take the first step toward getting a VA loan, here are some practical steps to keep in mind.
Estimating Your Closing Costs
Start by understanding how much you can expect to pay in closing costs. In most cases, it’s between 1% and 5% of the total loan amount. Ask the lender about the average closing costs borrowers pay to get a more accurate idea of how much you’ll likely have to pay.
Strategies for Budgeting
Next, calculate how much you can realistically afford to allocate towards closing costs. If you’ll be making a down payment, include this figure as well. That way, you’ll know how much money you’ll need to free up in your spending plan to allocate toward your home purchase goal.
Preparing Financial Documentation
If you take the time to gather and organize your income and financial documents, you can shave time off the lending process. You’ll also need your Certificate of Eligibility (COE) to prove you’re entitled to VA loan benefits. Request this in advance to avoid any hiccups or delays in the lending process.
Conclusion: The Benefits of Managing VA Loan Closing Costs
By familiarizing yourself with common VA loan closing costs, you’ll avoid any surprises when it’s time to seal the deal. Plus, you’ll know which tactics to use to minimize your out-of-pocket costs before reaching the closing table. Be sure to inquire about closing costs with the lender, shop around and request seller concessions.
FAQs About VA Loan Closing Costs
No, but you can receive up to 4% in seller concessions to help minimize these costs. Lenders may also offer credits to cover a portion of these expenses for you in exchange for a higher mortgage rate.
This rule caps the lender fee at 1% of the loan amount to keep lending costs manageable.
The VA funding fee can be included in the loan, but third-party fees must be paid upfront.
