While there is no down payment required on VA loans for qualified VA borrowers, there are still some loan costs and fees for which veterans are responsible.
The VA funding fee is one cost distinct to VA loans. It’s a set fee that applies to every purchase or refinance. It varies based on a few factors, including the nature of the buyer’s military service and whether the buyer has a prior VA loan. Buyers may be able to finance the funding fee into their loan amount
Regarding other loan expenses, the Veterans Administration divides closing costs into two ‘camps’ – allowable costs and non-allowable costs. This can get a bit confusing, so here is a closer look.
These are costs that can be paid by the homebuyer or the seller (or can be shared by both) and include (but are not limited to):
- Discount points
- Appraisal fees
- Title insurance
- Credit report costs
- Survey fee
- Recording fees
- State and local taxes
Lenders can also charge borrowers a flat origination fee; generally, 1% of the loan amount. This fee would cover the non-allowable costs. They are noted below.
These cannot be paid by the buyer. They include (but are not limited to):
- Loan closing/settlement fees
- Escrow fees/charges
- Document preparation fees
- Pre-payment penalties
- Tax service fees
- Notary fees
Who pays for non-allowable closing costs?
This can vary, from sellers agreeing to pay some costs (called a seller concession). Sellers who may be covering costs like funding fees, homeowners insurance and property taxes, etc. -- can only contribute up to 4% of the either the sale price or the appraised value of the home (whichever is lower).
Lenders can also pay for some of the closing costs if a seller can’t/won’t pay for some of the closing costs just mentioned. Real estate agents can also pay non-allowable costs.
Steps you need to take
When you’re buying a home with a VA loan, it’s important to:
- Closely review the Loan Estimate you’ll receive when you apply for a VA loan. It will break down your closing costs – and make clear the total cost to you of the mortgage.
- Ask your loan advisor and real estate agent a lot of questions to ensure that you understand your costs and clarify who will be paying them.
This will help you get a true picture of what it will take to afford your home, be able to plan accordingly, and be on course to successfully achieve your homeownership goal.