Can You Roll In Closing Costs on a VA Loan?

A VA loan, guaranteed by the U.S. Department of Veterans Affairs, offers a valuable benefit for eligible service members, veterans, and their surviving spouses seeking to purchase a home. While these loans often eliminate the need for a down payment, buying a home always involves various upfront expenses, commonly known as closing costs. A frequent question arises regarding these costs: can they be included in the VA loan itself? This article explores how these benefits interact with the financial realities of a real estate transaction.

Understanding Closing Costs

Closing costs represent the various fees and charges paid at the conclusion of a real estate transaction. These expenses are distinct from the down payment or purchase price, necessary to finalize the mortgage and transfer ownership.

Common examples include lender fees like loan origination fees, which cover administrative work. Third-party fees cover property appraisals, title insurance, and government recording fees. Prepaid items like initial property taxes and homeowners insurance premiums are also paid at closing to establish an escrow account. These collective costs typically range from 2% to 5% of the loan amount.

VA Loan Specifics for Closing Costs

The Department of Veterans Affairs has specific guidelines regarding which closing costs a borrower can pay, distinguishing between allowable and non-allowable fees. Allowable fees include the VA appraisal fee, credit report fees, survey fees, title insurance, recording fees, and a loan origination fee (capped at 1% of the loan amount). Non-allowable fees, which the VA prohibits the veteran borrower from paying, include attorney fees, brokerage fees, document preparation fees, and certain inspection fees. These non-allowable fees must be covered by other parties, such as the lender or seller.

A unique component of VA loans is the VA Funding Fee, a one-time charge paid directly to the VA. This fee helps offset the costs of the VA loan program, especially since VA loans do not require private mortgage insurance. The funding fee percentage varies based on factors such as the loan type, whether it’s a first-time or subsequent use of the VA loan benefit, and the amount of any down payment. For instance, a first-time user with no down payment might face a funding fee of 2.15%, while subsequent users with no down payment could see a rate of 3.3%.

The VA Funding Fee is the primary closing cost that can be financed or “rolled into” the loan amount for most borrowers. This fee is added to the principal balance, allowing the borrower to pay it off over the life of the mortgage rather than upfront. Certain borrowers are exempt from the VA Funding Fee, including veterans receiving VA disability compensation for a service-connected disability, those eligible for such compensation but receiving retirement pay, Purple Heart recipients, and qualifying surviving spouses. While the funding fee can be rolled in, most other traditional closing costs, such as appraisal or title fees, cannot be directly added to the VA loan principal.

The VA also requires an appraisal to determine the “reasonable value” of the property, ensuring the loan amount does not exceed this value. This protects the veteran from overpaying by ensuring the loan aligns with the home’s market value. The loan amount, including the financed funding fee, must not surpass this established reasonable value.

Alternative Ways to Cover Closing Costs

Since most closing costs cannot be rolled into a VA loan, borrowers often seek other avenues to cover these upfront expenses. One common method involves negotiating seller concessions. Sellers can contribute financially to the buyer’s costs, which can significantly reduce the cash needed at closing. The VA allows sellers to pay all of the buyer’s loan-related closing costs without these payments counting toward the general seller concession limit.

Beyond standard closing costs, VA rules permit sellers to offer additional concessions up to 4% of the loan amount. These concessions can cover items such as the VA funding fee, prepayment of property taxes or homeowners insurance, or even paying off the buyer’s debts to help them qualify for the loan.

Another option is lender credits, where a borrower might agree to a slightly higher interest rate in exchange for a credit from the lender that offsets some closing costs. Gift funds from family members or approved donors can also be used to cover closing costs, providing another source of funds without impacting the loan amount. Borrowers can also pay these costs out-of-pocket using their own savings.

Impact of Financing Closing Costs

When the VA Funding Fee is financed, or rolled into the loan amount, it directly increases the total principal balance of the mortgage. This means the borrower is taking out a larger loan than the home’s purchase price. For example, if a borrower takes out a $300,000 loan with a 2.15% funding fee, the loan amount becomes $306,450.

A higher loan amount naturally leads to higher monthly principal and interest payments over the life of the loan. While financing the funding fee can be convenient by reducing upfront out-of-pocket expenses, it also means paying interest on that portion of the loan for the entire repayment period. Over 15 or 30 years, this can result in a substantially greater amount paid in total interest. Borrowers should weigh the immediate benefit of reduced upfront costs against the long-term financial impact of increased total interest payments.