If you’re a first-time homebuyer, trying to sort out that tangled mound of string that makes up the costs and fees that come with closing a loan might leave you dazed, confused, and more than a little frustrated. The good news is that you’re not alone – even better, we’re here to help unravel the mess and offer some clarity by answering your most often-asked questions.
Q: What are the fees and closing costs of a VA Loan?
A: Like conventional mortgages, VA Home Loans come with assorted fees and closing costs, also known as settlement costs. VA closing costs generally range between 3 to 5 percent of the loan amount. Of course, they can vary depending on the home’s price and location. You pay most of these to the lender for their services. In other words, think of closing costs as representing the actual price of originating, underwriting, and processing a loan. Note that your loan cannot close before these costs are settled. But that doesn’t mean you don’t have some wiggle room where closing costs and fees are concerned.
The following is a list of some standard closing costs associated with VA Home Loans:
- Loan origination fees
Typically, the VA allows lenders to charge up to 1 percent of the loan amount to cover initiation, processing, and underwriting costs – essentially administrative chores. That’s right; lenders cannot charge more than 1 percent to cover their costs in processing your loan. So, if your loan is $200,000, your origination fees will average $2,000.
- Appraisal fee
All VA borrowers must get an appraisal, which evaluates the property according to the VA’s Minimum Property Requirements (MPRs) and determines the maximum loan amount a borrower can get without a down payment. The VA appraisal is a tool that lets the lender know the home meets minimum standards and is safe to inhabit. The current appraisal fee for a single-family home runs about $425. The VA sets the costs for appraisals, and they vary by location. You’ll pay the fee when the appraisal is completed. This fee is non-refundable whether or not the loan closes.
- Credit report
Your lender will pull your credit report to get information to assess how you manage credit. If you haven’t maxed out your credit cards or made a slew of late payments, you’re likely to be considered a reliable borrower. The good news is that although a lender might charge you for running a credit check, the VA places a $50 limit for this cost. So, this is not a fee that will make you wince.
- Title insurance
Title insurance protects the lender and borrower. As a borrower, the last thing you want is to find out after closing is that your dream home is up to its shingles in liens or legal defects. Getting a title insurance policy ensures that a title company conducts a thorough search and verifies that there are no outstanding liens against the home. Depending on your loan amount and regional insurance rates, you’ll pay several hundred dollars for title insurance.
- Discount points
You can purchase discount points to lower interest rates. A point is equal to 1 percent of the loan amount. VA rates are already among the lowest in the market, so this is not a typical fee, but it’s an option. Note that the buyer or seller may pay discount points.
- Inspection fees
Not to be confused with an appraisal, a home inspection isn’t mandatory, but this intense, top-to-bottom inspection protects the borrower from any problems not covered by the VA appraiser. As with the appraisal, you’ll pay for the inspection when it’s completed.
- Homeowner’s insurance and real estate taxes
At the closing, your lender will collect advanced payments for the first year of your new property’s homeowner’s insurance and property taxes. This is standard procedure.
- Recording fee
Usually under $100, this small fee is charged by local governments to record your deed on county records.
Q: Wow, those are a lot of costs. As the borrower, do I have to pay for all of them?
A: Remember we mentioned wiggle room earlier? Well, you should know that you might be able to wiggle out of some of those costs. The VA allows the seller to pay up to 4 percent of the home’s price in closing costs. These are called seller concessions, and they offset some of the settlement costs to make the property more affordable. Of course, the seller isn’t required to pay any of your specific charges. But if you’d like the seller to help cover your closing costs, you must let your real estate agent know before negotiating the purchase contract.
Here are some of the closing costs and fees you could negotiate with the seller to pay:
- VA funding fee
- Loan origination fee
- VA appraisal fee
- Home insurance and real estate taxes
- State and local taxes
- Title insurance
- Recording fee
Q: Seller concessions sound too good to be true. What’s the catch?
A: There’s no catch, really, but there are some downsides to keep in mind, especially in a seller’s market. For instance, if a home has multiple bids, which isn’t uncommon these days, then the seller might look more favorably on offers with fewer strings attached. And this is why you need to discuss seller concessions with your real estate agent beforehand. Also, remember to pick an agent who is familiar with VA Home Loans.
Q: Can I finance all of the closing costs and fees associated with my VA Loan?
A: No, you must pay settlement costs at closing. However, there is one exception. You may finance the funding fee by adding it to the loan amount. Note that the funding fee applies only to the loan amount, not the purchase price of the home. The funding fee doesn’t go to the lender. Instead, it’s a one-time fee paid to the Department of Veterans Affairs to support the VA Loan program for future Veterans and active-duty military. Borrowers putting down less than 5 percent on their home purchase will pay 2.3 percent of the total loan amount when buying a home for the first time and 3.6 percent on subsequent loans. VA borrowers can lower the funding fee by putting down more money on the property. Note that disabled Veterans are exempt from paying a funding fee.
Q: As a VA borrower, do I get a break on some settlement costs?
A: A resounding yes! The VA protects homebuyers from outrageous fees. So, there are plenty of expenses that can’t be charged to VA borrowers according to VA Loan program guidelines. Check out some of the costs you won’t have to pay:
- Escrow fee
The VA does not allow the Veteran borrower to pay an escrow fee.
- Document preparation fee
The fee charged by escrow for preparing final loan documents can’t be passed on to the VA homebuyer.
- Underwriting or processing fee
The VA won’t allow lenders to charge these fees. Instead, all lender fees must be included in the 1 percent loan origination fee.
- Real estate commissions
The VA won’t let buyers pay real estate commissions for either the buyer’s or the seller’s agent.
- Termite letter
It’s the seller’s responsibility to prove the home is termite-free.
- Notary fees
If the escrow company charges fees to send a notary to the borrower for a signing appointment somewhere other than the escrow company’s office, the escrow company can’t charge the borrower.
- Application fee
This is a fee some lenders charge upfront when a borrower applies for a VA Home Loan. However, a VA-approved lender won’t charge you an application fee.
- Tax service fee
This fee goes to the mortgage company to ensure they pay the real estate taxes.
This is just a partial list, so please check with your VA lender for specific allowable and non-allowable fees.
Q: How can I be sure I won’t be blindsided by the closing costs?
A: No worries. The Real Estate Settlement Procedures Act (RESPA) required your lender to provide a good faith estimate and a truth-in-lending statement of settlement service charges you’d likely incur at closing. Congress enacted RESPA in 1975 to provide homebuyers and sellers with complete settlement cost disclosures. Slight changes were made in 2015 when the two documents were combined into the loan estimate, which your lender must give you when applying for a mortgage. The loan estimate includes your estimated interest rate, monthly payment, and closing costs, among other details pertinent to your loan. Since all lenders use the same loan estimate, you can easily and quickly compare loans. Note that once you receive a loan estimate, it doesn’t mean that you’ve been approved for a loan.
If you have any further questions regarding VA Home Loans, don’t hesitate to contact one of our experienced loan officers at Aligned Mortgage. We’re available and eager to help you make your dream of homeownership come true.