Can You Finance Closing Costs on a VA Loan?

A VA loan is a mortgage option guaranteed by the U.S. Department of Veterans Affairs (VA) for eligible veterans, active-duty service members, and certain surviving spouses. This benefit provides favorable terms for homeownership. One of the primary advantages of a VA loan is the ability to purchase a home with no down payment, reducing the upfront financial burden.

Despite the no-down-payment benefit, homebuyers using a VA loan still encounter closing costs. These costs are separate expenses from the home’s purchase price and are incurred to finalize the real estate transaction.

Common VA Loan Closing Costs

Closing costs are various fees and expenses that buyers and sellers incur to complete a real estate transaction. These costs are typically paid on the closing day and are necessary to finalize the mortgage and transfer property ownership.

For a VA loan borrower, several common closing costs may be encountered.
The VA Funding Fee: A percentage of the loan amount paid directly to the VA.
Lender fees (origination fees): Cover the administrative costs of processing and underwriting the loan.
Appraisal fee: Covers the cost for a licensed appraiser to determine the home’s value.
Title insurance: Protects against defects in the property’s title.
Recording fees: Paid to the local government to officially record the new deed and mortgage.
Survey fees: May be required to verify property lines.
Prepaid items: Such as property taxes and homeowner’s insurance premiums for a certain period are also typically collected at closing.

VA Loan Allowances for Financing and Contributions

Generally, most closing costs associated with a VA loan cannot be directly financed into the loan amount itself. This means that a borrower typically needs to cover these expenses out-of-pocket, or through other approved methods, at the time of closing.

An exception to this rule is the VA Funding Fee, which can be financed into the loan amount. This fee is calculated as a percentage of the loan, with the exact rate depending on factors such as service history, down payment amount, and whether it’s a first-time or subsequent use of the VA loan benefit. For example, a first-time user with no down payment might pay a funding fee of 2.15% of the loan amount, while subsequent users might pay 3.3%.

Another exception for financing is for certain energy-efficient improvements (EEIs). These VA-approved improvements, such as solar heating or insulation, can be financed into the VA loan, allowing borrowers to incorporate the cost of these upgrades into their mortgage.

The VA also provides specific rules regarding contributions from other parties.

Seller Concessions

Seller concessions are a key allowance, permitting sellers to pay for certain closing costs and prepaid items on behalf of the buyer. The VA limits these concessions to 4% of the loan amount, in addition to reasonable discount points. Examples of costs sellers can cover include appraisal fees, title insurance, credit report fees, buyer’s discount points, certain prepaid property taxes and insurance, and even buyer’s judgments or debts.

Lender Credits

Lender credits offer another avenue for covering closing costs. A lender might provide a credit to the borrower to offset some or all of the closing costs in exchange for a slightly higher interest rate on the loan. This trade-off can reduce the upfront cash needed but may result in higher monthly payments over the life of the loan. The VA also prohibits specific fees from being charged to the veteran, such as attorney fees for loan closing unless state law explicitly requires them, or certain escrow fees.

Practical Approaches to Minimizing Upfront Costs

Borrowers can negotiate with sellers to cover a portion of their closing costs within the VA’s allowed limits. This negotiation should be outlined in the purchase agreement, detailing which specific costs the seller agrees to pay. A strong purchase offer, particularly in a less competitive market, can increase the likelihood of securing seller concessions, reducing the buyer’s upfront financial burden.

Utilizing lender credits is another approach for lowering out-of-pocket expenses. Borrowers should discuss this option with their VA-approved lender, understanding that accepting lender credits typically involves a slightly higher interest rate. It is important to compare the long-term cost of a higher interest rate against the immediate benefit of reduced closing costs to determine the most financially advantageous path.

Gift funds can also be a viable option for covering closing costs. The VA allows borrowers to receive monetary gifts from eligible donors, such as family members, to help with these expenses. Any gift funds must be documented, typically requiring a gift letter from the donor stating that no repayment is expected. This documentation ensures the funds are legitimate and not a hidden loan.

Comparing closing costs from various VA-approved lenders is a prudent step. Different lenders may have varying fee structures for origination, processing, and other services. Borrowers should request detailed loan estimates from multiple lenders to compare these costs line by line. Shopping for third-party services, like title companies or survey providers, where permitted, can help find more competitive rates and further reduce overall closing expenses.