Do You Have to Pay Closing Costs With a VA Loan?

While VA loans offer substantial benefits, such as no down payment requirements, they do not eliminate all closing costs. Borrowers using a VA loan will encounter various fees and expenses when finalizing their home purchase. These costs are distinct from the loan’s principal.

The VA Funding Fee

The VA Funding Fee is a one-time payment directly to the Department of Veterans Affairs. This fee helps offset the cost to taxpayers for guaranteeing these loans, ensuring the program remains available for future service members. The fee amount varies based on the type of loan, whether it is a first-time or subsequent use of the VA loan benefit, and the presence of a down payment.

For a first-time VA loan user with no down payment, the funding fee is 2.15% of the loan amount. This percentage can decrease to 1.5% with a down payment of 5% or more, and to 1.25% with a down payment of 10% or greater. Subsequent users of the VA loan benefit face higher fees, starting at 3.3% with no down payment, though these can also be reduced with a down payment.

Certain individuals are exempt from paying the VA Funding Fee. This includes veterans receiving VA compensation for a service-connected disability, or those eligible for such compensation but receiving retirement or active-duty pay instead. Recipients of the Purple Heart and surviving spouses receiving Dependency and Indemnity Compensation (DIC) are also exempt from this fee.

The funding fee can be paid at closing or financed into the total loan amount, spreading the cost over the life of the mortgage. Financing the fee increases the loan principal, leading to slightly higher monthly payments and total interest paid over time. Borrowers who believe they are exempt should ensure their Certificate of Eligibility (COE) reflects this status.

Fees Not Paid by VA Loan Borrowers

The Department of Veterans Affairs designates certain fees as “non-allowable” for the veteran to pay. These prohibited fees are absorbed by the seller, waived by the lender, or paid by another party involved in the transaction. This policy helps make VA loans more accessible by reducing the out-of-pocket expenses for the homebuyer.

Examples of non-allowable fees include attorney fees for lender representation, real estate agent commissions for the buyer’s agent, and prepayment penalties. Application fees, escrow fees, rate lock-in fees, and charges for document preparation are also generally prohibited from being charged to the VA borrower.

Additional non-allowable costs include fees for appraisals requested by the lender, inspection fees not required by VA standards, and various administrative charges like postage or notary fees. Lenders are limited to a 1% origination fee, and any costs exceeding this or falling under the non-allowable category cannot be passed on to the VA borrower.

Allowable Closing Costs for VA Loan Borrowers

Despite non-allowable fees, VA loan borrowers are responsible for various closing costs considered standard in real estate transactions. These allowable fees are similar to those with conventional mortgages and cover services essential to the loan process and property transfer. Understanding these expenses helps borrowers prepare for their home purchase.

Among the common allowable closing costs is the VA appraisal fee, which covers the valuation of the property to ensure it meets VA minimum property requirements. Borrowers also typically pay for a credit report fee, allowing the lender to assess creditworthiness. Survey fees, which determine property boundaries, are an allowable expense if required for the transaction.

Recording fees, charged by local government entities to officially register the property transfer, are an allowable cost. Title insurance, which protects both the lender and potentially the homeowner against title defects or claims, is a permissible expense. Lender’s title insurance is standard, and owner’s title insurance may also be an allowable cost depending on local customs and negotiation.

Other allowable costs include discount points to lower interest rates, and a loan origination fee, capped at 1% of the loan amount. Prepaid items like property taxes and homeowners insurance premiums are part of the closing costs. A pest or termite inspection fee, if required by the VA, is an allowable expense.

Ways to Cover Closing Costs

The total amount due at closing can be substantial, often ranging from 1% to 6% of the loan amount. Several strategies exist to help VA loan borrowers reduce or manage these upfront expenses. These options can significantly lower the cash needed to close the transaction.

Seller concessions allow the home seller to contribute towards the buyer’s costs. The VA allows sellers to contribute up to 4% of the loan amount towards various concessions, including the VA funding fee, prepaid items like property taxes and hazard insurance, or paying off some of the buyer’s debts. Beyond this 4% cap, sellers can also pay for all of a buyer’s allowable loan-related closing costs without limit.

Lender credits can reduce out-of-pocket costs. In this scenario, the lender agrees to cover some or all of the closing costs in exchange for the borrower accepting a slightly higher interest rate on the loan. While this means higher monthly payments and total interest over the loan term, it is an option for borrowers with limited funds for closing.

Gift funds from eligible donors can also be used to cover closing costs. There is no limit on gift funds a VA borrower can receive, but proper documentation, including a gift letter stating no repayment is expected, is required. Funds must be verified through a clear paper trail, such as bank statements or wire transfer receipts.

Some lenders may offer “no-closing-cost” VA loans, where the lender absorbs most of the closing costs. This results in a higher interest rate for the borrower, as the lender recovers these costs over the loan’s life. While it eliminates upfront out-of-pocket expenses, borrowers should evaluate if increased interest payments outweigh the benefit of avoiding initial costs.