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.
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:
VA loan closing costs diverge from the closing costs for a traditional mortgage in a few ways. Most importantly:
Likewise, VA loans prohibit these fees commonly included in conventional home purchases:
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.
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.
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.
In some cases, borrowers who use VA loans may be exempt from a funding fee. These instances covers borrowers who are:
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.
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