Who Pays Closing Costs on a VA Loan?

For eligible service members, veterans, and surviving spouses, VA loans offer significant benefits, but like all mortgage types, they involve various closing costs. These costs are the fees and expenses incurred to finalize a real estate transaction. While VA loans are known for advantages such as no down payment requirement, certain expenses must still be covered at closing. The payment responsibility for these costs is often shared among the veteran borrower, the seller, and the lender, guided by regulations established by the Department of Veterans Affairs.

Understanding VA Loan Closing Costs

For a home purchase using a VA loan, closing costs typically range from 3% to 5% of the total loan amount. While many closing costs are common across all mortgage types, VA loans have distinct rules governing which fees can be charged to the veteran borrower.

The VA categorizes fees as either “allowable” or “non-allowable.” Allowable fees are those the VA permits the veteran to pay, while non-allowable fees are explicitly prohibited from being charged to the veteran. This framework protects veteran borrowers from excessive charges. If a fee is non-allowable for the veteran, another party, such as the seller or the lender, must cover it.

Veteran Borrower’s Payment Obligations

Veteran borrowers are responsible for specific fees at closing, as dictated by VA guidelines. One of the most notable is the VA Funding Fee, a one-time payment that helps sustain the VA home loan program. This fee typically ranges from 0.5% to 3.3% of the loan amount, with the exact percentage depending on factors like loan type, whether it’s a first-time or subsequent VA loan use, and the amount of any down payment.

The VA Funding Fee can be paid in cash at closing or financed into the loan amount, though financing it increases the total interest paid over time. Certain veterans are exempt from this fee, including those receiving VA disability compensation, active-duty service members awarded the Purple Heart, and surviving spouses of service members who died in service or from a service-connected disability. This exemption can significantly reduce the veteran’s out-of-pocket expenses.

Beyond the VA Funding Fee, veterans are generally permitted to pay for several other allowable costs. These include the appraisal fee, which covers the cost of a VA-approved appraiser determining the home’s value and ensuring it meets VA property requirements. Veterans also typically pay credit report fees.

Other allowable charges for the veteran borrower may include discount points, which are optional fees paid to lower the interest rate on the loan. One discount point usually equals 1% of the loan amount. Recording fees, which cover the cost of legally registering documents with local government, are also typically paid by the borrower. Title insurance, which protects the lender’s interest in the property, is another common borrower expense.

Seller’s Contribution Limits

Sellers can play a significant role in covering closing costs for a VA loan. The VA has specific rules regarding seller contributions, categorizing them into two main areas: standard closing costs and seller concessions. Sellers can pay all loan-related closing costs that are typically the buyer’s responsibility without these amounts counting against the VA’s concession limit.

The VA also allows sellers to provide “concessions,” which are financial incentives or contributions beyond standard closing costs. These concessions are limited to a maximum of 4% of the lesser of the property’s purchase price or appraised value. Examples include the VA Funding Fee, prepaid expenses like property taxes and homeowners insurance, and even paying off a buyer’s debts to help them qualify for the loan. This limit is designed to prevent inflated property values.

Costs traditionally the seller’s responsibility that do not count against the 4% concession limit include real estate commissions and certain inspection fees like termite reports. While the seller is not obligated to offer concessions, negotiating these contributions can substantially reduce the veteran’s out-of-pocket expenses at closing.

Lender’s Role in Closing Costs

Lenders also have a defined role in the structure and payment of VA loan closing costs. A primary component is the loan origination fee, which covers the lender’s administrative costs for processing and underwriting the loan. The VA imposes a strict cap on this fee, limiting it to a maximum of 1% of the total loan amount. This “1% rule” protects veterans from overcharges.

If a lender charges the flat 1% origination fee, they are generally prohibited from adding separate charges for items the VA considers overhead, such as application fees, document preparation fees, or notary fees. Many fees itemized in other loan types are encompassed within that 1% for a VA loan. If the lender does not charge the full 1% origination fee, they may itemize certain allowable fees otherwise included in the 1% cap.

Lenders may also offer “lender credits” to help offset a borrower’s closing costs. A lender credit means the lender agrees to cover a portion of the closing costs in exchange for the borrower accepting a slightly higher interest rate on the loan. While this reduces the upfront cash needed at closing, it results in higher monthly mortgage payments and increased interest paid over the loan’s lifetime.