Can Closing Costs Be Rolled Into a VA Loan?

Beyond the property’s purchase price, securing a home loan involves various expenses. Veterans utilizing their VA loan benefit often ask if these additional costs can be incorporated into the loan amount. Understanding the specific regulations set forth by the Department of Veterans Affairs is important for managing these financial aspects effectively.

The VA Funding Fee and Loan Amount

The VA funding fee is a one-time charge paid directly to the Department of Veterans Affairs. This fee helps offset the cost of the VA loan program, which does not require a down payment or monthly mortgage insurance. The amount of the funding fee is calculated as a percentage of the loan amount and varies based on several factors. These factors include the type of loan, whether it’s a first-time or subsequent use of VA loan benefits, and the amount of any down payment. For instance, a first-time user with no down payment might pay 2.15% of the loan amount, while subsequent users without a down payment could face a 3.3% fee. Making a down payment can reduce the funding fee percentage.

The VA funding fee is typically the only cost that can be rolled directly into the VA loan amount, increasing the principal. This option allows veterans to reduce their upfront out-of-pocket expenses at closing, though it means paying interest on the fee over the life of the loan. However, some veterans are exempt from paying the funding fee. This exemption applies to veterans receiving VA compensation for a service-connected disability, those eligible for such compensation but receiving retirement or active-duty pay, Purple Heart recipients, and surviving spouses receiving Dependency and Indemnity Compensation (DIC).

VA Loan Rules for Closing Costs

Beyond the VA funding fee, closing costs encompass various expenses incurred during a mortgage transaction. These often include appraisal fees, title insurance, recording fees, and lender origination fees. While the VA funding fee can often be financed, most other closing costs typically cannot be rolled into the VA loan’s principal amount. This policy helps protect veterans from accumulating excessive debt.

The VA establishes specific rules and limitations regarding who pays these costs. Allowable closing costs a veteran might be responsible for paying separately include the VA appraisal fee, credit report fee, and title insurance.

Lenders may charge an origination fee, generally capped at 1% of the loan amount, to cover administrative services. If a lender charges this 1% fee, they are prohibited from charging additional fees for items considered overhead, such as loan application or processing fees. If the lender charges less than the 1% origination fee, they may itemize other allowable fees up to that 1% cap.

VA loan closing costs can vary, often ranging from 1% to 6% of the loan amount. The exact percentage depends on factors like the loan amount and property location.

Alternative Ways to Cover Closing Costs

Since most closing costs cannot be rolled into the VA loan, veterans often explore alternative methods to cover these expenses. One common strategy involves seller concessions, where the seller agrees to pay a portion of the buyer’s closing costs or provide other financial incentives. The VA allows sellers to cover all loan-related closing costs without a specific dollar limit. Sellers can also provide concessions for other items, such as the VA funding fee, debt payoff, or pre-payment of the buyer’s hazard insurance, up to a limit of 4% of the loan amount. These concessions are often negotiated as part of the purchase agreement.

Another option is to utilize lender credits. A lender might offer a credit towards closing costs, which can reduce the upfront cash needed at closing. This credit is typically provided in exchange for a slightly higher interest rate on the loan. While this reduces immediate expenses, it can lead to higher total interest payments over the life of the loan.

Gift funds also present a viable way to cover closing costs. The VA allows gift funds from eligible donors, such as family members or close friends, to be used for closing costs, the VA funding fee, and even a down payment.

For these funds to be acceptable, specific documentation is required, including a gift letter from the donor. This letter must state the amount of the gift, the date of transfer, and confirm that no repayment is expected. The donor should not be an interested party in the transaction, such as a builder or real estate agent. Lenders may require proof of transfer like bank statements.