How Much Are Closing Costs on a VA Loan?

Buying a home involves financial aspects beyond the purchase price. Closing costs are additional expenses incurred at the end of a real estate transaction. For VA loan users, these costs are a factor, despite benefits like no down payment for many eligible borrowers. Understanding these costs is crucial.

What Are Closing Costs for a VA Loan?

Closing costs are fees and charges associated with finalizing a mortgage and transferring property ownership. For VA loans, these typically include lender fees, third-party service charges, and government fees. These expenses are distinct from the loan amount and are generally paid at closing.

Lender fees cover administrative expenses for processing and underwriting the loan. These can include an origination fee, which compensates the lender for preparing the loan. Underwriting fees cover the lender’s evaluation of the application and borrower’s creditworthiness. Processing fees cover handling paperwork and coordinating the transaction.

Third-party fees are paid to entities outside the lender for essential services. An appraisal fee goes to a VA-approved appraiser to assess property value and ensure it meets VA minimum requirements. A credit report fee covers obtaining the borrower’s credit history. Title insurance is typically required, protecting the lender and buyer from title defects.

Other third-party expenses include recording fees, charged by local governments to register property ownership transfer and mortgage liens. A survey fee may be necessary in some areas to confirm property boundaries. A pest inspection is often mandatory in specific regions for VA loans. A flood zone determination fee ascertains if the property is in a flood hazard area, which could require flood insurance.

The VA Funding Fee is a significant government charge specific to VA loans. This one-time fee is paid directly to the Department of Veterans Affairs to reduce program costs for taxpayers, as it typically requires no down payment or mortgage insurance. The fee amount varies based on loan type, first or subsequent use of benefits, and down payment. For example, first-time users with no down payment typically pay 2.15% of the loan amount, while subsequent users without a down payment generally pay 3.3%. A higher down payment can reduce the percentage.

Certain borrowers are exempt from the VA Funding Fee. This includes veterans receiving VA compensation for service-connected disabilities, those who would receive such compensation but are receiving retirement or active-duty pay, and eligible surviving spouses. Purple Heart recipients are also exempt. If a veteran’s disability claim is pending at closing but later approved, they may be eligible for a refund.

Beyond these fees, borrowers account for prepaid items and initial escrow deposits. These are collected at closing to cover expenses due shortly after purchase, such as initial property tax payments, first-year homeowner’s insurance premiums, and prepaid interest. These funds are typically placed into an escrow account managed by the loan servicer to ensure timely future payments for taxes and insurance.

VA-Specific Rules for Closing Costs

The Department of Veterans Affairs establishes rules and limitations on closing costs veterans can pay. These regulations protect veterans from excessive charges and ensure program affordability. A distinction exists between “allowable” and “non-allowable” fees charged to the veteran borrower.

Allowable fees are those the VA permits a veteran to pay directly. These typically include the VA appraisal fee, credit report fee, and recording fees. Lender’s title insurance premiums are also generally allowable. Other allowable costs might include a survey fee, if required, and a pest inspection fee where mandatory. These are considered reasonable and customary charges.

In contrast, “non-allowable” fees are expenses the VA prohibits veterans from paying. This protects veterans from costs deemed administrative overhead or another party’s responsibility. Examples often include attorney fees, escrow fees, document preparation fees, and certain loan processing charges. Real estate agent commissions are also explicitly non-allowable for the veteran.

The “1 percent rule” concerns loan origination fees. A lender can charge a flat fee not exceeding 1% of the loan amount to cover all administrative costs for originating, processing, and underwriting the loan. If this 1% origination fee is charged, the lender is generally prohibited from itemizing and charging separate fees for services considered part of their overhead, such as loan application or processing fees. This rule simplifies the cost structure and limits lender charges.

Seller concessions reduce a veteran’s out-of-pocket expenses at closing. These are seller contributions towards the buyer’s closing costs or other financial benefits. For VA loans, seller concessions are capped at 4% of the loan amount. This limit applies to costs beyond standard closing costs, such as the VA funding fee, prepaid property taxes, or paying off a veteran’s debt to help qualify. The seller can also cover all standard loan-related closing costs without counting against the 4% limit. However, seller concessions are negotiable and not mandatory.

Lender credits can also offset closing costs. A lender may offer a credit to the borrower to cover various closing expenses. These credits are often provided in exchange for the borrower accepting a slightly higher interest rate. This reduces upfront cash needed at closing, though it may increase interest payments over the loan’s lifetime. Lender credits offer flexibility in managing immediate financial burdens.

Estimating Your VA Loan Closing Costs

Estimating VA loan closing costs involves reviewing key lender documents. The Loan Estimate (LE) and Closing Disclosure (CD) provide transparency, allowing borrowers to anticipate and verify expenses. These standardized documents make it easier to compare lender offers.

The Loan Estimate is a three-page form lenders must provide within three business days of receiving a loan application. It details the estimated interest rate, projected monthly payment, and itemized closing costs. The LE provides a “good faith” estimate, helping borrowers understand potential expenses before committing to a loan. It includes sections for loan costs, shoppable and non-shoppable services, and other charges like taxes and initial escrow payments.

When reviewing the Loan Estimate, be aware of tolerance levels for fees, which dictate how much certain costs can change between the LE and the final Closing Disclosure. There are three categories of tolerance:
Zero tolerance fees: These, such as lender origination fees and transfer taxes, cannot increase unless there’s a valid change in circumstances. If they increase without reason, the lender is generally responsible for the difference.
10% cumulative tolerance fees: These can collectively increase by no more than 10% from the LE amount. This category includes charges for shoppable third-party services (e.g., title services, recording fees) and lender-required non-shoppable services. If the total increase exceeds 10%, the lender must cover the excess.
No tolerance fees: These, such as prepaid interest, homeowner’s insurance premiums, and escrow deposits, can change by any amount, provided the original estimate was based on the best available information.

The Closing Disclosure is a five-page form providing final mortgage loan and closing cost details. Lenders must provide it at least three business days before the scheduled closing date. The CD details actual loan terms, final projected monthly payments, and a precise breakdown of all fees. Compare the Closing Disclosure with the initial Loan Estimate to identify discrepancies.

Several factors influence total VA loan closing costs. The loan amount is significant, as many fees, including the VA Funding Fee and origination fees, are percentage-based. Geographic location also plays a role, as local and state taxes, recording fees, and title work charges vary. The chosen lender can affect costs due to varying fee structures for allowable charges. Buyers can mitigate costs by comparing Loan Estimates and negotiating seller concessions.