How Much Are Closing Costs With a VA Loan?

A home purchase involves various financial obligations beyond the agreed-upon price, collectively known as closing costs. These are fees paid at the conclusion of a real estate transaction, covering services and expenses associated with finalizing the mortgage and transferring property ownership. For those utilizing a VA loan, specific regulations govern these costs, making it important to understand how they differ from conventional mortgages and what to anticipate during the home buying process.

Understanding VA Loan Closing Costs

Closing costs represent the various fees and charges incurred during the home loan process, paid by either the buyer or seller at the time of closing. These expenses are distinct from the down payment and typically include charges from the lender, third-party service providers, and governmental entities. For a VA loan, these costs generally range from 3% to 5% of the total loan amount, though this can vary based on factors like location and specific loan details. For example, a $300,000 loan might incur closing costs between $9,000 and $15,000.

Allowable closing costs under VA guidelines often fall into categories such as lender-specific fees, third-party charges, and prepaid items. Lender-specific fees include origination fees, which cover the lender’s cost for processing and underwriting the loan, and discount points, which a borrower might choose to pay to lower their interest rate. The VA limits lender origination fees to a maximum of 1% of the loan amount. Third-party fees encompass costs for services provided by external parties, such as appraisal fees, title insurance fees, recording fees, survey fees, credit report fees, and pest inspection fees. Prepaid items, while not technically fees, are expenses paid in advance, like property taxes and homeowners insurance premiums, which are typically collected at closing to establish an escrow account.

The Department of Veterans Affairs (VA) has specific rules about what fees a veteran borrower cannot be charged. These “non-allowable” fees protect veterans from excessive expenses. Examples of fees that cannot be charged to the veteran include attorney fees, brokerage fees, document preparation fees, escrow fees, notary fees, and loan application or processing fees. If a lender charges the maximum 1% origination fee, they are generally prohibited from charging additional itemized fees for services considered part of overhead. This framework helps ensure that obtaining a VA loan remains financially accessible for eligible service members and veterans.

The VA Funding Fee: Calculation and Exemptions

The VA Funding Fee is a one-time charge paid directly to the Department of Veterans Affairs, serving to offset the cost of the VA loan program to taxpayers. This fee helps sustain the program, which does not require a down payment or private mortgage insurance for most borrowers. The amount of the funding fee is calculated as a percentage of the loan amount and varies based on several factors, including whether it is the first or subsequent use of VA loan benefits, the amount of any down payment made, and the type of loan (e.g., purchase, refinance).

For purchase loans, the funding fee rates differ based on prior usage and down payment. For a first-time VA loan user with no down payment, the fee is typically 2.15% of the loan amount. This rate increases to 3.30% for subsequent users who also make no down payment. However, making a down payment can significantly reduce the fee; for instance, a down payment of 5% or more lowers the funding fee to 1.50% for both first-time and subsequent users.

For cash-out refinance loans, the fee is generally 2.15% for first-time use and 3.30% for subsequent use, regardless of down payment. Interest Rate Reduction Refinance Loans (IRRRLs), also known as streamline refinances, typically have a lower funding fee of 0.50%.

Certain individuals are exempt from paying the VA Funding Fee. These exemptions are primarily granted to veterans who receive VA compensation for service-connected disabilities. Other exempt categories include veterans who would be eligible for disability compensation but receive retirement or active-duty pay instead, Purple Heart recipients, and surviving spouses of veterans who died in service or from service-connected disabilities. The VA confirms exemption status, often noted on the veteran’s Certificate of Eligibility (COE). For those not exempt, the funding fee can be financed directly into the loan amount, allowing borrowers to avoid paying it out-of-pocket at closing, though this means paying interest on the fee over the loan term.

Allocating Closing Cost Responsibilities

While some closing costs are traditionally the responsibility of the homebuyer, VA loan guidelines offer flexibility in who covers these expenses. The VA aims to reduce the financial burden on veteran borrowers by limiting what they can be charged. Veterans are typically responsible for specific allowable fees, such as the appraisal fee, credit report fee, and recording fees. If a borrower chooses to pay discount points to reduce their interest rate, those are also their responsibility. However, the VA strictly prohibits charging veterans for certain fees, including attorney fees, broker fees, and loan application fees, meaning these costs must be covered by other parties in the transaction.

Sellers are permitted to contribute to a buyer’s closing costs and other expenses through what are known as seller concessions. The VA allows sellers to pay all of a buyer’s loan-related closing costs without counting against the concession limit. Beyond these standard closing costs, seller concessions are capped at 4% of the loan amount. This 4% limit can cover items such as the VA Funding Fee, prepaid property taxes and insurance, or even paying off certain debts on behalf of the buyer to help them qualify for the loan. It is important to note that seller concessions are a matter of negotiation between the buyer and seller.

Lenders can also contribute to covering closing costs through lender credits. This arrangement typically involves a credit to the borrower to offset closing costs, often in exchange for a slightly higher interest rate. This option can reduce the upfront cash needed at closing, but it results in higher monthly payments and greater overall interest paid over the life of the loan. The specific allocation of responsibilities is determined during the negotiation phase of the home purchase and finalized through the loan documents.

Strategies for Estimating and Reducing Your Out-of-Pocket Costs

Understanding and managing closing costs is an important part of the VA loan process. Borrowers receive key documents designed to provide transparency and allow for comparison. The Loan Estimate (LE) is a document lenders are required to provide within three business days of receiving a loan application. This estimate details projected monthly payments, a breakdown of estimated loan-related closing costs, and other anticipated expenses, offering a comprehensive overview of the financial commitments. It also indicates the total cash needed at closing. Borrowers should compare Loan Estimates from different lenders to identify the most favorable terms.

Prior to closing, the lender must provide a Closing Disclosure (CD) at least three business days before the scheduled closing date. This document contains the final figures for all loan terms, including the interest rate, loan amount, and total closing costs. The Closing Disclosure allows borrowers to compare the final costs against the initial Loan Estimate. This mandatory review period gives borrowers time to ask questions or dispute any discrepancies before signing the final loan documents.

Several strategies can help reduce the out-of-pocket cash required at closing. Negotiating with the seller to cover a portion of the closing costs is a common approach.

Sellers can pay all loan-related closing costs, and up to 4% of the loan amount in concessions for other expenses like the VA Funding Fee or prepaid items. Utilizing these seller concessions can significantly lower the cash a borrower needs to bring to the closing table.

Another option is to accept lender credits, where the lender covers some or all closing costs in exchange for a slightly higher interest rate. While this reduces upfront expenses, it typically leads to increased interest payments over the loan’s duration.

Additionally, the VA Funding Fee can be financed into the loan amount, which means it is added to the principal balance and paid over time rather than upfront. This strategy reduces immediate cash outlay but increases the total loan amount and the interest accrued.

Some lenders may also offer “no-closing-cost” loans, where they cover most or all closing costs, typically in exchange for a higher interest rate. While this eliminates upfront closing costs, the higher interest rate will result in larger monthly payments throughout the loan term.