What Closing Costs Are VA Buyers Not Allowed to Pay?

Homeownership is a significant goal for many, and for eligible service members, veterans, and their surviving spouses, VA loans provide a unique pathway. These loans are distinct due to their specific benefits, including the absence of a down payment requirement and unique regulations concerning closing costs. The Department of Veterans Affairs (VA) has established clear guidelines to protect buyers from excessive financial burdens at closing, setting them apart from conventional loan options.

Understanding VA Loan Fee Restrictions

The Department of Veterans Affairs implements strict rules regarding closing costs. Their purpose is to make homeownership more attainable and affordable for service members and veterans. These regulations are a protective measure, limiting the out-of-pocket expenses that eligible buyers incur when finalizing their home purchase. The VA aims to shield borrowers from unnecessary or inflated fees, preserving the financial advantages associated with VA loans and supporting its beneficiaries.

The VA’s protective stance ensures the loan remains beneficial and does not become a source of unexpected financial strain. These guidelines help prevent situations where borrowers might face significant upfront costs that could undermine the zero-down payment benefit. By setting clear boundaries on what fees can be charged to the borrower, the VA fosters a more secure and predictable closing experience. This regulatory oversight helps maintain the integrity and value of the VA home loan program.

Specific Closing Costs VA Buyers Cannot Pay

VA loan regulations explicitly prohibit eligible buyers from paying certain closing costs, commonly referred to as “non-allowable fees.” These restrictions reduce the financial burden on veterans and make homeownership more accessible. Understanding these prohibitions is important for any VA loan applicant.

A significant restriction involves lender origination fees. Lenders can charge an origination fee, capped at 1% of the loan amount. This 1% fee covers administrative costs, such as processing and underwriting the loan. If a lender charges this flat 1% fee, they are prohibited from itemizing and charging additional overhead fees, such as application, processing, document preparation, interest rate lock-in, or notary fees.

Historically, real estate agent commissions for the buyer’s agent were non-allowable fees for VA buyers. However, as of August 10, 2024, the VA updated its policy. VA loan borrowers can now pay reasonable and customary amounts for buyer-broker charges, including commissions and other related fees. This temporary change aims to keep veterans competitive in a shifting real estate market.

Certain administrative and miscellaneous fees are also non-allowable for the VA borrower. These include loan closing or settlement fees, escrow fees (unless related to title work), and tax service fees. The intent is to prevent lenders from unbundling their overhead costs and passing them directly to the buyer outside of the 1% origination fee.

The VA generally prohibits buyers from paying for certain types of inspections. For example, appraisals ordered by the lender or seller to dispute a low VA appraised value, or inspections requested by parties other than the lender or veteran, are non-allowable. While previously the buyer was often prohibited from paying for a wood-destroying insect (termite) inspection, VA guidelines updated in June 2022 now allow the homebuyer to pay for this inspection if required. State-specific rules and negotiation dynamics can still influence who ultimately covers this cost.

Attorney fees are another category with specific VA rules. VA loans prohibit borrowers from paying attorney fees unless directly related to title work. In such cases, they are considered part of the title charges rather than a separate attorney fee. Additionally, prepayment penalties are non-allowable, ensuring VA borrowers are not penalized for paying off their loan early.

Other Closing Costs and Payment Responsibilities

While the VA prohibits buyers from paying certain fees, VA buyers are allowed to pay various closing costs. These include the VA funding fee, which helps offset the loan program’s cost, and the appraisal fee, which covers the property’s value assessment. Other common allowable fees are credit report fees, title insurance, recording fees, survey fees, and prepaid items like hazard insurance and property taxes.

For fees VA buyers are not allowed to pay, responsibility typically falls to other parties in the transaction. The seller is often the primary party covering these non-allowable fees. This is frequently facilitated through “seller concessions,” where the seller agrees to pay a portion of the buyer’s closing costs or other expenses. The VA allows sellers to contribute up to 4% of the loan amount in concessions, which can include the VA funding fee, prepaid taxes and insurance, or paying off the buyer’s debts to help them qualify for the loan. This 4% limit for concessions is separate from standard closing costs, which sellers can also cover without counting towards this cap.

If the seller does not cover these costs, or if non-allowable fees exceed the seller concession limit, the lender may be responsible for absorbing them. Lenders might also offer lender credits to cover some closing costs in exchange for a slightly higher interest rate, effectively reducing the cash the buyer needs at closing. Real estate agents may also contribute to these costs in some instances. These mechanisms ensure the VA buyer does not bear the burden of prohibited expenses.