VA Loan Closing CostsUpdated: January 3, 2023
Anticipating VA Loan closing costs is an important part of budgeting and saving up for your home loan. Do you know what to expect? The VA mortgage loan benefit is one of the most important advantages of joining the U.S. military, and if you plan to use this home loan once you’ve served enough time in uniform to qualify, you’ll want to know what to save up for.
It’s best to begin planning and saving at least 12 months ahead of your loan application, more if possible.
The reason being that unexpected expenses along the way can crop up and you’ll want to add some money for a “cushion” should you be required to dip into the money set aside for your loan closing costs between your planning and the application stage of the loan.
The Definition of Closing Costs
The term “closing costs” is loosely defined and can refer to many expenses associated with your mortgage. Some closing costs may be financed, others may not. And some expenses associated with your loan may be paid by the seller, while others may not. VA mortgage loan rules make it clear that any down payment you make is a separate expense from all other closing costs.
That does not mean the down payment isn’t due at closing time, but it does mean that your down payment is subject to certain restrictions including preventing the seller from paying money toward your down payment. The seller IS permitted to help you with up to 4% of the non-down payment closing costs you incur.
Some readers understand that VA mortgages feature no down payment in many cases, and may be confused by our discussion of making down payments, but the VA Lender’s Handbook (VA Pamphlet 26-7) explains that borrowers who make a down payment of five or ten percent are authorized to receive a reduced VA loan funding fee (see below) as a result of making that down payment.
That’s why it’s a very good idea to consider your options with regard to making the down payment–you could save yourself some money in other areas by saving the extra funds to put down.
Some closing costs may not apply to certain borrowers–this is usually true of those exempt from the VA loan funding fee (see below), and not all VA borrowers will make or choose to make a down payment. Some lenders may forego certain fees but charge others to make up for not requiring things like the lender’s flat charge for doing business on the loan (see below).
VA Home Loan Closing Costs
The VA Origination Fee
You may be charged an origination fee up to one percent of the loan, which is intended to offset lender expenses associated with your home loan. A lender can choose to charge you the one percent fee, or forego that fee but charge other costs that would not be normally allowed.
What are those costs? Borrowers who pay the lender’s fee must not be charged for items including the following:
- Escrow fees
- Notary Public fees
- Tax services
- Loan application fees
- Processing fees
- Interest rate lock-in fees
- Lender Appraisals
The VA Appraisal Fee
This expense varies depending on the housing market, but you may find it safe to save $400-$600 for this expense as a general rule. For VA mortgages, the lender does not set the appraisal fee, that is the job of the VA.
Appraisal fees are up-front costs paid for services rendered and are not refundable after the work has been completed even if you choose not to proceed with the loan or the loan is denied.
Title insurance is an expense you should discuss with your loan officer. This type of insurance can protect both the buyer and the lender in cases where there are legal issues, liens, or other problems associated with the title after the loan closes.
The VA Loan Funding Fee
This expense is unrelated to the lender’s fee, and is charged to veterans who use their VA home loan benefit.
The VA Loan Funding Fee offsets the taxpayer burden on the VA mortgage loan program and certain veterans–those who receive or are eligible to receive VA compensation for service-connected medical issues are exempt from having to pay this fee. However, this exemption is NOT automatic–talk to a lender to learn what you will need to do to claim the exemption.
If you are interested in lowering your mortgage loan interest rate you can purchase discount points to permanently buy down the interest rate on your mortgage.
Doing so can save you money over the lifetime of the loan, but if you think you may sell the home without paying off the mortgage (especially if you only plan to keep the home a few years or less than 10 years) buying discount points may not be in your interest.
Do the math on the percentages or ask a participating VA lender to help you understand whether discount points are right for your situation and financial plans. Ask the lender how much you will save over the lifetime of the loan when buying discount points and make your decision from there.
Credit Report Fees
Some, but not all lenders charge a fee for accessing your credit reports. This fee is comparatively low side-by-side with other charges like the appraisal fee, but the VA does impose a limit on how much the lender may charge for this expense.
Pest Control Fees
A wood destroying pest inspection report may be required as a part of the VA appraisal process even if there are no prominent signs of an infestation. As a borrower, you may need to pay for the inspection and any repairs needed to meet VA minimum property requirements. Alternatively, you can negotiate and ask the seller to cover these costs.
Septic And Well Inspections
It is important to differentiate between an inspection fee and a repair fee–you may be required to pay for repairs to bring a well or septic system up to code where required. Remember that the VA does not establish health code rules for wells and septic systems but relies on the local authority to establish standards within that jurisdiction.
The Home Inspection
This is NOT a required fee established by the Department of Veterans Affairs, but it may as well be. Why? Because no home buyer should purchase a home that has not been inspected.
An appraisal is NOT an inspection even though many industry professionals casually refer to the appraisal process as such. The home inspection is arranged and paid for by the borrower and you should never buy a home without the inspection.
You cannot make an informed decision about the true nature of the property without the inspection and VA appraisals do not require the appraiser to step onto the roof, enter hard-to-access areas of the home, etc.
Buying a home without an inspection is identical in all respects to buying a car without ever having driven it first. You simply have no idea what you are getting. The home inspection fee is something borrowers should save up for as a mandatory expense even though it technically is not one.
Joe Wallace is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News