No matter which side of the homebuying equation you’re on, nobody likes closing costs. These are costs and fees associated with procuring and finalizing a home purchase or refinance, and most of them must be paid before you get the keys to your dream home. But the VA mortgage program does an exceptional job of limiting what veterans can pay in closing costs.
That cost consciousness is a benefit designed to help make homeownership accessible to generations of service members.
But on the whole, closing costs are often confusing for homebuyers — first timers or otherwise. Let’s take a closer look at what to expect.
Allowable VA Closing Costs
Closing costs can come in many different forms. In a strict sense, closing costs represent the actual cost of doing a loan. There are also prepaid finance charges (PFC) and paid outside closing (POC) costs to contend with when closing day arrives. PFC costs are directly associated with the loan and can ultimately affect your overall APR (annual percentage rate), which reflects the total cost of borrowing.
PFC items can include things such as:
- Escrow for prepaid interest, property taxes and homeowners insurance
- Points used to buy down an interest rate, which isn’t all that common with VA home loans
- The VA Funding Fee, which the VA charges and veterans can roll into the loan or ask the seller to pay
- Homeowners association dues if applicable
Items marked “POC” aren’t factored into your overall financing, but they still have to be covered. These can be things like:
- Credit reports
- Pest inspection fee
- The VA appraisal, which is mandatory
- Home inspection if the buyer chooses to get one (which you always should)
Last, there are the closing costs associated with the loan product itself. Those typically include fees for:
- Origination, underwriting and processing
- Title exam and insurance
- Survey (if needed)
Lenders have a couple of options when it comes to the costs related to originating and processing your loan. They can charge a flat 1 percent origination fee (along with the other normal charges up to a reasonable amount) or skip the flat rate and charge fees on an individual basis, as long as the total dollar amount doesn’t exceed that same 1 percent of the loan amount.
Non-Allowable Closing Costs
There are plenty of other potential costs and fees the VA does not allow homebuyers to pay. Minimizing closing costs remains one of the biggest VA loan benefits. Some of those non-allowable closing costs on a VA mortgage include:
- Lender document fees
- Recording fee above $17
- Notary Fees
- Transaction Coordinator Fees
- Broker fees
- Termite inspection fees
It gets tricky trying to estimate closing costs for individual borrowers, since it varies based on a number of factors. Once you fill out a full loan application, which will likely include the address of the home you’re hoping to purchase, a lender has three business days to send you what’s called a Good Faith Estimate (GFE). This document will give you a basic snapshot of the loan, including estimates for your closing costs. It doesn’t obligate you to that particular loan amount or lender. But it generally gives you a good idea of the costs associated with your home purchase, and that’s helpful when it’s time to negotiate with the seller.
Paying Closing Costs
Who actually pays your closing costs often depends on what you’re able to negotiate with the person selling you the home. The VA has no cap on how much a home seller can contribute toward a buyer’s loan-related closing costs, so you can certainly ask the homeowner to cover all of it. In addition, a seller can pay up to 4 percent of the loan amount in what’s known as concessions. These are things like prepaid finance charges or liens against the borrower.
But sellers are under no obligation to pay anything. Homebuyers in housing markets that are starting to heat up may find some sellers reluctant to take on all or even some of those closing costs. But for VA borrowers it’s still pretty common to have the seller pay most if not all.
In the end, it’s really about what you and your Realtor can negotiate. You should also turn to your mortgage professional for suggestions and help when the time comes to craft an offer.
We would love to hear from you about about getting the most from your hard-earned VA home loan benefits at 702-326-7866