In a VA Transaction, Who Pays the Points?

A VA loan is a mortgage option backed by the U.S. Department of Veterans Affairs, designed to help eligible service members, veterans, and surviving spouses achieve homeownership. A significant benefit of this program is often the absence of a down payment requirement, making home acquisition more accessible. This article clarifies who typically bears “points” in a VA loan transaction.

Understanding Loan Points

Loan points are fees paid to a lender at the time of a mortgage transaction. These charges are typically a percentage of the total loan amount. There are two primary types of loan points, each serving a distinct financial purpose.

Origination points, also known as origination fees, are charges paid to the lender for processing and underwriting the loan. These fees cover the administrative costs incurred by the lender to create the mortgage. One origination point generally equals 1% of the loan amount and does not reduce the interest rate.

Discount points, conversely, are charges paid to the lender to “buy down” or reduce the interest rate on the loan. This upfront payment can result in lower monthly mortgage payments over the life of the loan. Typically, one discount point costs 1% of the loan amount and may lower the interest rate by approximately 0.25%, though the exact reduction can vary by lender.

Buyer’s Responsibility for Points

VA loan guidelines specify what fees a borrower is permitted to pay directly. A key rule is the 1% origination fee, which lenders can charge to cover all their processing and underwriting expenses. This fee is comprehensive and limits the lender from charging additional itemized fees for services considered part of loan origination.

Borrowers using a VA loan can also elect to pay discount points. This is an optional choice made by the veteran to lower their interest rate, potentially reducing their monthly payments. Paying discount points is considered a strategic decision that can yield long-term savings for borrowers who plan to keep their loan for an extended period.

Certain fees are designated as “non-allowable” for the veteran to pay directly to the lender. These typically include charges like attorney fees, document preparation fees, broker fees, and some escrow charges. If these fees arise, they must be covered by another party in the transaction or absorbed by the lender, protecting the veteran from unexpected costs.

Seller Contributions and Point Payments

Sellers can contribute financially to a VA loan transaction through a mechanism known as seller concessions. These concessions are financial incentives offered by the seller to help reduce the buyer’s out-of-pocket expenses. VA regulations cap these seller concessions at 4% of the loan amount.

The 4% concession limit is distinct from standard closing costs that a seller might typically cover. Seller concessions can be used to pay for the buyer’s discount points, which helps lower the veteran’s interest rate. They can also cover non-allowable fees that the buyer is prohibited from paying, such as certain attorney or document preparation fees.

Seller concessions can also cover prepaid property taxes and homeowner’s insurance premiums. The VA Funding Fee, a mandatory charge for most VA loans, cannot be paid by the seller as a concession, but it can be financed into the loan or paid by the buyer directly.

Lender credits offer another way for some costs, including points, to be covered. A lender might provide a credit to the borrower to offset closing costs. In exchange, the borrower typically accepts a slightly higher interest rate on their loan.

Additional Closing Costs for VA Borrowers

Beyond loan points, VA loan borrowers will encounter other closing costs as part of the home purchase process. An appraisal fee is always required to determine the property’s market value and ensure it meets VA minimum property requirements. The buyer typically pays this fee, though it can sometimes be negotiated for the seller to cover it.

Inspection fees, such as those for a general home inspection, pest inspection, or specialized checks for wells and septic systems, are common. While the VA appraisal assesses basic safety and habitability, a separate home inspection is highly recommended and usually paid for by the buyer.

Title insurance and escrow fees are also part of closing. Title insurance protects both the lender and the buyer against future claims to the property’s ownership. Escrow fees cover the services of an impartial third party who manages funds and documents until the transaction is complete; the payment of these fees can vary by local custom or negotiation. Recording fees, which are governmental charges to officially register the property transfer, are typically paid by the buyer. Additionally, buyers often pay for prepaid items at closing, including initial property taxes and homeowner’s insurance premiums, which are collected to establish an escrow account.