Who Pays Closing Costs on a VA Loan?

A VA loan offers a pathway to homeownership for eligible service members, veterans, and surviving spouses. Understanding the financial aspects, particularly closing costs, is important for navigating the home-buying process. This article clarifies VA loan closing costs, identifying who typically pays them, which costs borrowers can pay, which are prohibited, and how other parties can contribute.

Understanding VA Loan Closing Costs

Closing costs are fees and expenses incurred during the home buying process, beyond the down payment, that are paid at loan closing. These costs compensate parties like lenders, appraisers, and title companies. For VA loans, these fees typically range from 3% to 5% of the total loan amount, though they can vary based on location and lender.

A key component of VA loan closing costs is the VA Funding Fee. This one-time governmental charge supports the VA loan program. The fee amount varies based on factors such as loan type, first-time or subsequent use of the VA loan benefit, and any down payment. For instance, a first-time VA borrower with no down payment typically pays a funding fee of 2.15% of the loan amount, while repeat users might face a higher fee. Certain individuals are exempt from paying the VA Funding Fee, including veterans receiving VA compensation for a service-connected disability, those eligible for such compensation but receiving retirement pay, active-duty service members awarded the Purple Heart, and surviving spouses receiving Dependency and Indemnity Compensation.

Costs the Borrower Can Pay

VA regulations specify which closing costs a borrower is permitted to pay. The VA Funding Fee, if applicable, is a cost the borrower can pay upfront or finance into the loan amount.

Other allowable fees for the borrower include charges for the appraisal, which determines the property’s value. Borrowers are also responsible for the credit report fee. Recording fees, charged by local government entities to register the property’s change of ownership, are also an allowable expense. Additionally, title insurance, which protects both the lender and the homeowner against future claims on the property’s title, is a cost the borrower can incur.

Costs the Borrower Cannot Pay

The Department of Veterans Affairs prohibits borrowers from paying certain “non-allowable” fees. These prohibited charges typically include specific lender fees beyond a certain limit, such as application fees, rate lock fees, and some processing or underwriting fees. The VA generally limits the total origination fee a lender can charge to 1% of the loan amount, covering most administrative costs. If a lender charges this flat 1% fee, they cannot separately charge for other items like document preparation or escrow fees.

Real estate agent commissions and certain broker fees are also generally non-allowable for the VA borrower; these expenses are typically paid by the seller. Attorney fees, unless directly related to title work, are often non-allowable for the borrower. Fees for inspections ordered by the lender or third parties, other than the standard VA appraisal or a veteran-requested inspection, are also prohibited for the borrower.

Seller and Lender Contributions

Beyond the borrower’s direct responsibilities, other parties can contribute to covering closing costs on a VA loan. Sellers can offer “seller concessions,” which are financial contributions made to the buyer. The VA allows sellers to pay all of a buyer’s loan-related closing costs without these payments counting toward the separate 4% concession limit. For example, sellers can cover the VA Funding Fee, appraisal fees, title insurance, and recording fees.

The 4% limit on seller concessions applies to other specific items not typically considered standard closing costs. These can include prepaid expenses like property taxes and homeowner’s insurance, funds to pay off the buyer’s debts to help qualify for the loan, or payments towards interest rate buydowns. This flexibility allows sellers to assist buyers in reducing their out-of-pocket expenses at closing.

Lenders can also provide “lender credits” to offset a borrower’s closing costs. This involves the lender covering some 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 typically results in higher monthly payments and greater interest paid over the loan’s lifetime. Lender credits can be a strategic option for borrowers who prefer to minimize upfront costs, even if it means a higher overall cost of borrowing.