Who Pays Closing Costs With a VA Loan?
Navigate the complexities of VA loan closing costs. Understand who is responsible for payments, from buyers and sellers to alternative solutions.
VA loans are a valuable benefit for eligible service members, veterans, and their surviving spouses, known for often requiring no down payment. While this advantage makes homeownership more accessible, it can lead to the misunderstanding that VA loans have no costs. Though the down payment is often waived, various expenses are involved in completing a home loan. Understanding who pays these costs is important.
Understanding VA Loan Closing Costs
Closing costs are fees charged by third parties in a real estate transaction. They cover administrative and legal processes to finalize a home loan and transfer ownership. For VA loans, costs typically range from 1% to 6% of the loan amount, varying by location and loan details.
Lender fees include loan origination, appraisal, and credit report fees. Title service fees cover title search for clear ownership and title insurance, protecting both lender and homeowner. Additional expenses include government recording fees, survey fees, and prepaid items like property taxes and homeowner’s insurance premiums often held in escrow. The VA funding fee is a distinct, mandatory, one-time charge paid to the Department of Veterans Affairs to sustain the loan program.
Buyer’s Permitted and Prohibited Costs
The Department of Veterans Affairs has specific guidelines on which closing costs a VA loan borrower can pay and which are prohibited. These regulations protect veterans from excessive fees. Borrowers can pay for “reasonable and customary” charges.
Permitted costs include the VA funding fee (0.5% to 3.6% of loan amount, depending on loan type and prior usage). Other allowable fees include the loan origination fee (limited to 1% of the loan amount), which covers lender administrative services. Borrowers can also pay for the VA appraisal fee, credit report fees, recording fees, and title insurance premiums.
The VA prohibits borrowers from paying certain “non-allowable fees.” These costs must be absorbed by another party, like the seller or lender, or waived. Examples include attorney fees (unless for title work), real estate agent commissions, loan application fees, rate lock fees, and certain lender administrative fees. These prohibitions reduce the financial burden on veterans.
Seller’s Permitted Contributions
Sellers can cover closing costs for VA loan transactions through seller concessions. These are financial contributions from the seller to reduce the buyer’s out-of-pocket expenses. The VA has specific limitations on these contributions.
Sellers can pay all of a VA buyer’s standard loan-related closing costs without counting toward the VA’s concession limit. This includes lender’s origination fee, appraisal fee, and title insurance. Beyond these standard costs, the VA permits sellers to offer additional concessions up to 4% of the lesser of the sales price or reasonable property value.
This 4% limit applies to items beyond typical closing costs. Examples include the VA funding fee, prepaid property taxes, homeowner’s insurance premiums, and paying off certain buyer debts (e.g., credit cards, auto loans) to aid mortgage qualification. Sellers can also use these concessions for interest rate buydowns. Negotiating seller concessions can significantly decrease the veteran’s upfront cash, making homeownership more attainable.
Other Ways Costs Are Covered
Beyond buyer payments or seller contributions, other mechanisms manage or reduce VA loan upfront costs. Lender credits are one option. A lender may offer a credit to offset some closing costs. In exchange, the borrower typically agrees to a slightly higher interest rate, effectively financing a portion of closing costs.
The VA funding fee, typically paid by the borrower, has specific exemptions. Veterans receiving VA disability compensation, those eligible for VA compensation but receiving retirement or active-duty pay for a service-connected disability, and Purple Heart recipients are exempt from this fee. This exemption can save eligible individuals a notable amount, as the funding fee can be a significant closing cost.
Refinancing options handle closing costs uniquely. For a VA Interest Rate Reduction Refinance Loan (IRRRL), or VA Streamline Refinance, the funding fee is typically 0.5% of the loan amount, lower than for purchase loans. Many closing costs, including the funding fee, can be rolled into the new loan amount for IRRRLs and VA Cash-Out Refinances, reducing immediate out-of-pocket expense.