Who Pays Closing Costs on a VA Loan?

VA loans, a significant benefit for eligible servicemembers, veterans, and surviving spouses, offer unique advantages such as no down payment requirements for many borrowers. Like all home purchases, these involve various fees and charges due at closing. Understanding who pays these costs is important for anyone considering this home financing option. This article clarifies the typical allocation of closing costs in a VA loan transaction.

Understanding VA Loan Closing Costs

Closing costs represent the various fees paid at the culmination of a real estate transaction. For VA loans, these costs typically range from 1% to 6% of the total loan amount, varying by location and specific lender fees. These expenses fall into several categories.

Lender-specific fees encompass charges levied by the financial institution providing the loan. These may include an origination fee, covering the lender’s administrative costs for processing and underwriting the loan. The VA limits this origination fee to a maximum of 1% of the loan amount. If this flat fee is charged, the lender cannot charge separately for many other individual services. Discount points, chosen by the borrower to lower the interest rate, are also a lender-related cost.

Third-party fees are paid to entities outside of the lender and buyer/seller. These commonly include appraisal fees, for assessing the home’s value and ensuring it meets VA minimum property requirements. Other third-party costs often involve title insurance fees, protecting against future claims on property ownership, and recording fees, paid to the local government to officially register the new deed. Survey fees and credit report fees are also common third-party charges.

Prepaid items are expenses paid at closing to cover costs that will accrue after the sale. These often include initial property taxes and homeowner’s insurance premiums, typically placed into an escrow account for future payments. Daily interest charges on the loan from the closing date to the end of the month also fall under this category.

A distinct cost unique to VA loans is the VA Funding Fee, a one-time payment that helps offset the program’s cost to taxpayers. This fee, usually a percentage of the loan amount, can range from 0.5% to 3.3% depending on factors like loan type, first-time or subsequent use, and down payment amount. While typically paid at closing, this fee can often be financed into the loan amount, increasing the total loan principal.

Assigning Responsibility for Closing Costs

Responsibility for paying VA loan closing costs is distributed among the veteran buyer, the seller, and sometimes the lender, following specific Department of Veterans Affairs guidelines. These guidelines aim to protect veterans from excessive charges.

The veteran borrower is generally responsible for certain “allowable” fees. These typically include the VA Funding Fee, unless an exemption applies. Veterans also usually pay for prepaid items like property taxes and homeowner’s insurance premiums. Other allowable fees the veteran may pay include appraisal fees, credit report fees, and recording fees. While the VA allows an origination fee up to 1% to be charged to the veteran, this fee covers many services that cannot be itemized and charged separately.

The VA has a specific list of “non-allowable” fees that cannot be charged to the veteran borrower. Examples include attorney fees (unless related to title work), loan application or processing fees, brokerage fees, interest rate lock-in fees, and certain inspection fees. If a lender charges the flat 1% origination fee, these non-allowable fees are considered covered by that charge. These fees must be absorbed by the lender, paid by the seller, or covered by another party.

Sellers can play a significant role in covering closing costs for a VA loan. There is no specific limit on how much a seller can contribute towards a buyer’s standard loan-related closing costs, such as appraisal, title, and recording fees. Beyond these standard costs, sellers can also offer “seller concessions,” capped at 4% of the loan amount. These concessions cover items outside of typical closing costs but can still provide financial relief to the buyer.

Seller concessions can cover various expenses, including the VA Funding Fee, prepaid property taxes and insurance, and even paying off the buyer’s debts like credit card balances or auto loans to help with loan qualification. They can also be used for temporary or permanent interest rate buydowns by paying discount points. While not obligated, sellers often negotiate these points in real estate transactions.

Lenders may also contribute to covering closing costs through lender credits. A lender credit reduces the borrower’s out-of-pocket closing costs in exchange for a slightly higher interest rate on the loan. This option effectively rolls the closing costs into the loan’s interest over its lifetime. It can be a useful strategy for veterans who prefer to minimize upfront cash requirements, though it results in higher overall interest paid.

Strategies for Covering Closing Costs

Veterans have several strategies to manage or reduce out-of-pocket closing costs. Negotiating seller concessions is a primary strategy to reduce upfront costs. Buyers can request that the seller cover some or all allowable closing costs, such as appraisal fees or title insurance. Sellers can contribute up to 4% of the loan amount in concessions, which can cover the VA Funding Fee, prepaid taxes, insurance, or even help pay down other debts. This negotiation is a crucial part of the home purchase process, influenced by market conditions and seller motivation.

Another option is to consider lender credits, sometimes called “no-cost” VA loans. Here, the lender covers some or all closing costs in exchange for a slightly higher interest rate. While this reduces upfront cash, it means the borrower pays more interest over the loan’s life, leading to higher monthly payments and a greater total cost. Carefully evaluate the long-term financial implications.

Certain veterans are exempt from paying the VA Funding Fee, a substantial saving. This exemption applies to veterans receiving VA disability compensation for a service-connected disability, those who would receive such compensation but are receiving retirement or active-duty pay instead, and Purple Heart recipients. Eligible surviving spouses may also be exempt. If a veteran becomes eligible for disability compensation after closing, they may be able to receive a refund of the funding fee.

Gift funds can also cover various VA loan closing costs. Money gifted from eligible donors, such as family members, fiancés, employers, or non-profit organizations, can be applied towards the VA Funding Fee, other closing costs, or a down payment. Lenders require proper documentation, such as a gift letter and proof of transfer, to verify that the funds are a true gift and not a loan.

Veterans can also directly negotiate specific lender fees. While the VA has regulations on what lenders can charge, some fees might be negotiable depending on the lender and the specific loan product. Reviewing the Loan Estimate, which provides a detailed breakdown of estimated costs, is an important step to identify potential areas for negotiation or clarification.