VA Loan Closing Costs
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Summary:
Loans from the U.S. Department of Veterans Affairs are famous for their no-money-down 100% loan-to-value mortgages for protected veterans. VA loans also come with some caps on closing costs and fees, and there are some non-allowable closing fees, which a VA loan borrower cannot pay by law. However, veterans will still need to pay closing costs when they purchase a property, including an additional VA funding fee.
The U.S. military offers many programs that can be extremely beneficial to those who serve. For example, the military will pay for a prospective doctor’s medical school as long as they serve in the military for 10 years after they graduate. Another perk for those who served in the U.S. military is the VA loan program. The VA loan program allows protected veterans to receive a 100% loan-to-value ratio on their mortgage among other benefits. As for the closing costs veterans pay for VA loans, it’s a bit more of a mixed bag. They will have some reduced costs but an additional VA funding fee that can run up to 3.6% of the purchase.
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VA loans
VA loans are given to qualified protected veterans who have served in the United States military. As a way for the U.S. government to say, “Thank you for your service,” it gives amazing loan terms to those veterans who qualify. Some of these benefits are as follows:
- No down payment
- No private mortgage insurance needed
- Looser credit requirements
- Looser debt-to-income ratios
- Limits on certain closing costs and fees
Closing costs for VA loans
Borrowers with a VA home loan will have to pay closing costs, just like everyone else. That being said, these loans do have curbs on some of the higher closing costs that individuals might have to pay. On the other hand, veterans will have to pay an extra closing cost to help subsidize the VA program. Here is what you need to know about the specific VA program closing costs.
VA funding fee
This is the only fee that veterans need to pay that regular civilians will not have to pay. This is a one-time fee that veterans are required to pay at closing for a VA loan. The fee is used to subsidize the VA program, which serves millions of veterans every year.
The amount of the VA funding fee depends on what type of mortgage you get (first mortgage vs. refinance) and how much skin you have in the game with your down payment. The Department of Veterans Affairs breaks it down like this.
Purchase and construction loans
| If your down payment is … | Your VA funding will be … | |
|---|---|---|
| First use | Less than 5% | 2.3% |
| 5% or more | 1.65% | |
| 10% or more | 1.4% | |
| After first use | Less than 5% | 3.6% |
| 5% or more | 1.65% | |
| 10% or more | 1.4% |
Cash-out refinance loans
| First use | After first use |
|---|---|
| 2.3% | 3.6% |
Other rarer VA loan types
| Loan type | VA funding fee |
|---|---|
| Interest Rate Reduction Refinancing Loans (IRRRLs) | .5% |
| Manufactured home loans (not permanently affixed) | 1% |
| Loan assumptions | .5% |
| Vendee loan for purchasing VA-acquired property | 2.25% |
The VA funding fee for buyers will be greater on a second use than it will be for a first loan, but only for those who put down less than 5%. If you put down at least 5%, then all subsequent veteran funding fee percentages will be the same. For a cash-out refinance, no matter the terms, a second use of a VA loan will increase the fee from 2.3% to 3.6%.
Considering a refinance? Compare your options for a VA loan refinance below.
The VA funding fee can be waived
There are certain instances when the VA funding fee is not required. The Department of Veterans Affairs states that this fee can be waived if the following criteria are met.
- You’re receiving VA compensation for a service-connected disability or
- You’re eligible to receive VA compensation for a service-connected disability, but you’re receiving retirement or active-duty pay instead or
- You’re receiving Dependency and Indemnity Compensation (DIC) as the surviving spouse of a Veteran or
- You’re a service member who has received a proposed or memorandum rating before the loan closing date that says you’re eligible to get compensation because of a pre-discharge claim or
- You’re a service member on active duty who, before or on the loan closing date, provides evidence of having received the Purple Heart
Pro Tip
Even if you don’t qualify for the ability to waive the VA funding fee at first, you can request a refund at a later date. For example, if you end up with a service-connected disability but it doesn’t manifest itself until after you have gotten the loan, then you can request to have that VA funding fee refunded. A good example is the “burn pit” exposure many veterans suffered during the Iraq war.
Origination fee cap
Lenders will almost always charge origination fees on conventional loans. This is a percentage of the loan value that is charged for originating and underwriting the loan. The standard fee for this is 0.5%-1%, and by law, VA loans cannot exceed that 1% number.
This is important because no matter what, when you’re shopping for VA loans, you know that the origination fee cannot exceed 1%.
VA appraisal fee cap
Anytime you take a loan out, you need a third-party surveyor to appraise the value of your home. Depending on the surveying company, this can get pricey. The VA loan program makes sure that you don’t pay too much. Appraisal fees are capped between $425-$875, depending on your location (fees will be higher in high-demand areas).
Allowable and non-allowable fees
There are certain fees that you are allowed to pay when closing on a VA loan, and some you are not allowed to pay. Some of these are utilized to protect veterans from price gouging, and some of these are just fees that the VA doesn’t want to be associated with their program. Here is what the VA deems allowable and non-allowable fees.
Allowable fees
- VA funding fee (covered above)
- VA appraisal fee (covered above)
- Credit report fee
- Origination fee (<1%)
- Recording fee
- Title insurance
- Discount points
- Flood zone determination fee
- Fees associated with mailing items for a refinance
Non-allowable fees
- Real estate agent and brokers fees
- Application fee
- Rate lock fee
- Escrow fees
- Additional appraisals
What happens if a fee needs to be paid, but it’s non-allowable?
Look, we realize that some of these fees can be hard to get out of, particularly if you are dead set on a property and need to get a VA loan to finance it. In some cases, you can get the lender to cover some fees that otherwise wouldn’t be allowed. Shaun Martin, owner and CEO of the Home Buying Company in Denver, Colorado, has seen this before. “VA loan borrowers are not required to pay certain closing costs, such as private mortgage insurance, origination fees, or discount points,” he says. “Veterans may be able to negotiate with lenders to cover some of their closing costs as part of the loan agreement.”
Veterans may be able to negotiate with lenders to cover some of their closing costs as part of the loan agreement. - Shaun MartinClick to Tweet
Seller pays fees
In this case, the fees could be paid by a third party. This third party can be anyone, but it’s often the seller. A smart way to do this is to agree with the seller to tack the extra fees onto the price and have him pay the fees, along with the agent’s commission. These aren’t astronomical fees, so it should be relatively easy to do.
Remember, VA loans themselves are a way for the U.S. government to thank veterans for their service. Most civilians will also be appreciative and work with you on the non-allowable fees if necessary.
FAQ
Can closing costs be included in a VA loan?
Yes, you can even roll your VA funding fee into a VA loan in some circumstances. Adding these closing costs will effectively give you a bigger loan size with more interest, but it can be done.
How much are closing costs in a VA loan?
When a veteran pays closing costs on a loan, those fees are by no means a one-size-fits-all number. The VA funding fee, for example, takes into account the loan amount vs. the down payment as well as if it’s a first or second mortgage. Other closing costs also need to be paid, such as a credit report fee or title insurance fee, which can vary by property and lender. But expect your closing costs to be about 3-6% of the total cost.
How can I avoid closing costs with a VA loan?
You can roll your closing costs into your loan, which will help, but you aren’t avoiding them as much as deferring them. You may be able to waive the VA funding fee if you received a Purple Heart or have a service-related disability. There are also caps on fees like the loan origination fee, which will at least lower the amount you owe.
Key takeaways
- VA loans are famous for their 100% no-down-payment terms, but they also come with different closing costs than a conventional loan.
- VA loan borrowers have to pay extra closing costs in the form of the VA funding fee. But some of the other closing costs are capped or deemed non-allowable, which can save some money.
- The VA funding fee differs from person to person, based on whether the loan is a first or subsequent loan or a refinance and the down payment amount.
- The non-allowable closing costs and fees can sometimes complicate the closing process, but there are several workarounds that a prospective borrower can utilize.
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