Can closing costs be included in a VA loan?

For active-duty service members and veterans, VA loans offer a more accessible way to purchase a home. These loans have no down payment, lower credit limits, and competitive interest rates.

However, just because you don’t need a down payment doesn’t mean you won’t need any money in the bank. Like conventional mortgage loans, VA loans include closing costs that can become a potential obstacle in your homebuying journey.

VA loans have slightly different rules and requirements than conventional loans when it comes to closing costs so it’s important to understand how they work before getting one.

What are VA loan closing costs?

Any mortgage loan includes closing costs. Broadly speaking, these fees are paid to the lender for their assistance in creating and servicing your loan, but the term refers to all of the fees you’ll encounter in the closing process.

To close on a home, you must pay the closing costs when you’re signing the final paperwork. In the vast majority of cases, you’ll need to pay all of these closing costs (as well as the down payment, if applicable) in full at the closing table.

Closing costs typically include:

• Origination fee
• Funding fee
• Discount points (purchased to lower the interest rate on the loan, if desired)
• Credit check fee
• Title search and title insurance costs
• Hazard insurance
• Real estate taxes
• Recording fee

Do VA loan closing costs differ from conventional loan closing costs?

VA loan closing costs diverge from the closing costs for a traditional mortgage in a few ways. Most importantly:

• Non-allowable fees: Lenders of VA loans cannot require you to pay fees like prepayment penalties, settlement charges, and attorney fees. These can save you some money.
• Limited origination fee: Lenders always charge a mortgage origination fee when processing the loan. VA loans, however, have limits on that amount. Most mortgage loan origination fees range from 0.5 - 1% but there is no formal limit set. VA loans set the legal limit at 1%.
• VA funding fee: VA loans include a one-time fee paid to the Department of Veterans Affairs to support the continuation of the VA home loan program. The larger the down payment you make on a home, the smaller the funding fee will be. For a down payment less than 5%, the funding fee would be 2.3% of the total loan amount. However, speak to your loan officer before closing as there are some exemptions from this fee.
• VA appraisal fee: Most loans include an appraisal fee, but VA loans have a specialized VA appraisal fee as well. This usually ranges from $425 to $875 and is included in the closing costs. (A regular home appraisal typically costs $300 to $400.)

Likewise, VA loans prohibit these fees commonly included in conventional home purchases:

• Application fee
• Appraisal fee if ordered by the lender
• Home inspection fee if ordered by the lender
• Document preparation fee
• Attorney’s fees
• Mortgage rate lock fee
• Postage fee
• Escrow fee

How much are VA closing costs?

The final closing cost amounts depend on the lender you choose to work with, but VA loan closing costs tend to range from 3-5% of your loan amount. The law requires a VA lender to provide an estimate of all closing costs associated with your loan within three days of your application, as well as a final list of closing costs at least three days prior to your closing date.

Despite some of the extra fees like the VA funding fee and the higher VA appraisal fee, VA closing costs are very competitive. Add in the fact that you don’t need a down payment, and you may need as little as $12,000 to move forward with purchasing a $400,000 home.

Can closing costs be included in a VA loan?

If you’re really low on liquidity, you can roll some of the closing cost amount into the VA loan to pay off over time. However, the only fee you can do this with is the VA funding fee, which is a maximum of 1% of your total loan cost.

Opting to roll the funding fee into the whole loan will likely elevate the interest rate and increase your monthly payment. It’s a short-term benefit with long-term consequences so you should be absolutely sure it makes financial sense for you before choosing this option.

In addition to the funding fee, however, you may also negotiate seller or lender concessions to bring down the upfront cash you need to pay.

Can sellers pay VA loan closing costs?

When using a VA loan, the buyer, seller, and lender all pay different parts of the closing costs, with the buyer’s amount maxing out at 5% of the total loan amount. Sellers are required to pay for real estate commissions, any brokerage fees, and a termite report.

Sellers may also agree to pay a portion of the buyer’s closing costs to facilitate the sale, but their contribution cannot exceed 4% of the mortgage amount. When you account for the fees that sellers are already obligated to pay, they may not have a lot more wiggle room, but every little bit helps so it may be worth asking the seller to pay the max amount allowable.

Special circumstances for VA loan closing costs

In some cases, borrowers who use VA loans may be exempt from a funding fee. These instances covers borrowers who are:

• Living with a service-related disability and being compensated for the disability
• Living with a service-related disability and receiving military retirement pay rather than compensation
• An active duty Purple Heart recipient
• A surviving spouse whose partner died in service or from a service-related injury
• Eligible for compensation due to a pre-discharge

There are also city and county programs around the country that offer closing cost and down payment assistance programs so make sure to discuss your options with your loan officer.

VA loans make it easier for active duty and veteran service members to buy a home. But just because they require no down payment doesn’t mean you won’t need to bring some money to the closing table. Now, you have the knowledge of how much you might owe and what you can do to limit your out-of-pocket costs.