As an active-duty service member, veteran, or surviving spouse, VA loans offer the unique benefit of zero-down-payment homeownership. While you won’t need a down payment, you’ll still face closing costs.
What are VA loan closing costs?
Closing costs are fees associated with processing and finalizing your loan. Despite the no-down-payment advantage, VA loans still have closing costs that vary based on your lender, loan amount, and specific transaction details.
Breakdown of VA loan closing costs
Here’s a more detailed look at where exactly your money is going when you pay closing costs on your VA home loan:
Lender fees
These include fees related to the lender’s work in processing your loan.
- Origination fee: This fee is charged by your lender to process the loan. The VA caps this fee at 1% of the loan amount, ensuring it stays within a reasonable limit.
- Discount points: If you choose to lower your interest rate by purchasing discount points, you’ll pay this additional cost upfront. Each point typically costs 1% of the loan amount and can reduce your interest rate by 0.25%.
- Application fees: Some lenders may charge fees to process your application.
Third-party fees
These are fees paid to outside parties involved in the loan process:
- Funding fee: The funding fee is unique to VA loans and helps offset the cost of the program to taxpayers. The fee ranges from 0.5% to 3.3% of the loan amount, depending on factors like your down payment and whether this is your first VA loan.
- Appraisal fee: Paid to an appraiser to determine the home’s value
- Title search and insurance: This ensures there are no legal claims on the property and protects against future disputes.
- Credit check fee: Covers the cost of running your credit report
Government fees
These fees are necessary to record and finalize your loan and property transfer.
- Recording fee: Paid to the government to record the sale and mortgage
- Flood certification fee: Used to determine if your property is in a flood zone and requires additional insurance
- State and local taxes: These vary by state and may include transfer taxes and property taxes.
How much are VA loan closing costs?
The exact closing cost for a VA loan will vary based on the loan amount, your lender, and other factors. However, VA loan closing costs typically range from 1% to 6% of the loan amount.
A key advantage of VA loans is that the VA limits certain fees to protect borrowers from excessive costs. For example, some fees like attorney fees are not allowed to be charged to VA borrowers.
By law, your lender must provide a loan estimate within three days of receiving your loan application, detailing estimated closing costs. At least three days before closing, you’ll receive a Closing Disclosure with the final cost breakdown.
VA loan closing costs vs. other loan types
If you’re deciding between a VA loan and other loan types, it’s important to understand how VA loan closing costs compare to those of conventional and FHA loans.
- No mortgage insurance: Unlike FHA loans, which require an upfront mortgage insurance premium of 1.75% and monthly mortgage insurance payments, VA loans do not require mortgage insurance. This offers significant savings for VA borrowers, particularly if you’re financing a large loan.
- Fee limitations: VA loans cap the lender’s origination fee at 1% and prevent lenders from charging certain fees. This isn’t the case with conventional or FHA loans, where lenders have more flexibility in the fees they charge.
- Seller concessions: With VA loans, the seller is allowed to contribute up to 4% of the home’s sales price toward the buyer’s closing costs. While FHA loans allow up to 6%, the cap on VA loans still provides some assistance to reduce out-of-pocket costs.
How to pay for VA loan closing costs
Once you understand the closing costs involved in a VA loan, the next step is deciding how to pay for them.
Pay out-of-pocket
The most straightforward way to cover closing costs is to pay them in full at closing. This ensures that you don’t add any additional debt to your loan balance. If you’ve saved enough for closing costs, this can be the most cost-effective option in the long run.
Ask the seller to contribute
Sellers can cover up to 4% of the sales price in closing costs, including the funding fee. You can negotiate this as part of the purchase agreement.
For VA loans, sellers are also required to pay for certain expenses, such as real estate agent commissions and termite inspections, which also help reduce your cost.
Roll costs into your loan
In some cases, you can roll the funding fee into your loan amount rather than paying it upfront. This can be helpful if you’re short on cash, but it does mean you’ll pay interest on the funding fee over the life of the loan. It’s important to carefully weigh the long-term cost of this option. The funding fee is the only closing cost that can be rolled into a VA loan.
Tips for reducing VA loan closing costs
While VA loans are designed to limit certain costs, you can take steps to further reduce your closing expenses.
- Compare lenders: Different lenders charge different fees, so shopping around can help you find the most competitive rates and closing costs.
- Negotiate with the seller: Ask the seller to cover a portion of your closing costs as part of the deal. This is common in many real estate transactions and can save you thousands.
- Reduce the funding fee: If you make a down payment on a VA loan, even though it’s not required, you can reduce the funding fee you’re charged. This can lower your overall costs significantly.
With all of these strategies to lower closing costs, a VA loan could be the right option for you to make your homebuying dreams a reality.
