Can You Roll Closing Costs Into a VA Loan?

A VA loan offers a distinct advantage to eligible service members, veterans, and surviving spouses, primarily through its no down payment benefit. While this benefit significantly reduces upfront costs, understanding how closing costs are handled remains a common question. Although some closing costs can be rolled into a VA loan, specific limitations and rules govern which expenses qualify. This article clarifies which costs can be included and their financial implications, offering a comprehensive overview for those navigating the homebuying process with this benefit.

Costs That Can Be Included

The Department of Veterans Affairs (VA) home loan program minimizes out-of-pocket expenses for eligible borrowers, allowing certain closing costs to be incorporated into the loan. The primary cost that can be financed into a VA loan is the VA funding fee. This one-time fee helps offset the program’s cost to taxpayers, ensuring its continued availability without requiring mortgage insurance. The funding fee typically ranges from 0.5% to 3.3% of the loan, varying based on factors like loan type, first-time or subsequent use, and down payment. For example, a first-time user with no down payment might pay 2.15%, while subsequent users without a down payment could face 3.3%.

Beyond the funding fee, the VA permits borrowers to pay for specific “allowable” closing costs. These are generally paid upfront at closing, not rolled into the loan, except in certain refinance scenarios. Allowable fees, which must be reasonable and customary, include:
VA appraisal charges
Credit report fees
Title examination and title insurance
Recording fees (for transferring property ownership)

Lenders can charge an origination fee, capped at 1% of the loan amount, to cover administrative costs. If a lender charges this flat 1% origination fee, other specific fees, often termed “non-allowable” by the VA, cannot be passed on to the borrower.

Costs That Cannot Be Included

While the VA aims to limit upfront costs, certain expenses are explicitly prohibited from being financed into a VA loan and must be paid separately. These are often categorized as “non-allowable fees” by the VA, designed to protect borrowers from excessive charges. Examples of non-allowable fees include:
Most attorney fees not specifically related to title work
Real estate agent or broker commissions
Certain lender-specific charges like loan application or processing fees if the lender is charging the 1% origination fee
Prepayment penalties

Other necessary expenses for the home purchase are typically not rolled into the loan principal for purchase transactions. These include prepaid items such as property taxes, initial homeowner’s insurance premiums, and initial escrow deposits. These costs are usually due at closing and are paid by the borrower out-of-pocket.

How Including Costs Affects Your Loan

Financing eligible closing costs, primarily the VA funding fee, directly impacts the overall structure and cost of your VA loan. When the funding fee is rolled into the loan, it increases the principal loan amount. This means you are borrowing more money from the outset. As a result, your monthly mortgage payments will be slightly higher than if you had paid the funding fee upfront.

Over the entire term of the loan, financing the funding fee leads to a greater total amount of interest paid. Since interest accrues on the larger principal balance, the long-term cost of the loan increases. For example, on a $300,000 loan with a 2.15% funding fee ($6,450), rolling this fee into the loan means you are paying interest on $306,450 instead of $300,000 for the life of the loan. While this approach reduces the immediate out-of-pocket cash required at closing, it ultimately makes the loan more expensive over time. Borrowers must weigh the benefit of lower upfront costs against the increased long-term financial commitment.

Alternatives for Covering Closing Costs

For costs that cannot be rolled into the VA loan, or to reduce upfront expenses, several alternatives are available to borrowers. One common option is negotiating seller concessions, where the home seller agrees to pay some of the buyer’s closing costs. While sellers can cover all of a buyer’s loan-related closing costs without limit, additional seller concessions are capped at 4% of the loan amount. These concessions can include items such as the VA funding fee, prepaid property taxes, or even paying off certain buyer debts to help with loan qualification.

Another alternative is utilizing lender credits, which involve the lender covering some of the closing costs in exchange for a slightly higher interest rate on the loan. This reduces the cash needed at closing but increases the monthly payments and the total interest paid over the loan’s duration. Gift funds from family members can also be used to cover closing costs, providing a direct cash infusion without affecting the loan amount or interest rate. Finally, borrowers can simply pay eligible closing costs out-of-pocket, which is often the most cost-effective approach in the long run, as it avoids accruing interest on those amounts.