When you apply for a VA loan, you are applying for a benefit from the government in exchange for serving our country. This benefit, which is made possible by the U.S. Department of Affairs, provides you with many benefits including no down payment, low-interest rates, and flexible guidelines. The loan itself is provided by a private bank but is backed by the VA, which means the VA guarantees the loan for the lenders. If you were to default on the loan, which the default rate on a VA loan is the lowest in any category, the VA would pay a portion of the loan back to the bank. Because of this guarantee, the VA has a say in what loans are allowed to get approved and which are not. In addition, the VA has a say in what closing costs a lender can charge you.
Closing Costs on a VA Mortgage Loan
Every loan has closing costs – they are the costs that are necessary in order to process and fund the loan. This is where lenders make money but is also how certain companies stay in business, such as the title company, your attorney, and the lender itself. It costs money to pull your credit to see if you are able to repay the loan as well as underwrite it, search the title for liens, and insure it. All of these costs are a necessary component of a successful loan process. Some costs that are seen in loan programs, however, are deemed unnecessary and therefore not allowed on a VA loan.
Costs that are not Allowed
The costs that are not allowed on a VA loan are pretty typical of any loan type. These costs include things like
- Attorney fees
- Underwriting costs
- Processing or document fees
- Tax service fees
- Realtor commissions
If these fees are necessary to process a loan, how do they get paid? There are several ways a lender can get around the fees that the VA does not allow.
The seller can pay the fees for the borrower as part of a prearranged agreement when signing the sales contract. The buyer can agree to pay a slightly higher sales price for the home in exchange for the seller to pay the closing costs that equal up to 4 percent of the sales price of the home.
In some states, the realtor can pay for a portion of the closing costs with a credit at the closing. The agent receives a commission from the seller in the form of a percentage of the sales price of the home. The agent can then turn around and credit the buyer for the closing costs that are not allowed or even those that are and that agent agreed to pay for at the time of the sales contract signing.
The lender can also pay the non-allowed closing costs in exchange for a higher interest rate on the loan. Because the lender makes money in two ways: the interest rate and the fees charged on the loan, they can offset the charges that are not allowed by charging a slightly higher interest rate and not charging the closing costs. This is an agreement between the lender and borrower and needs to be determined before the interest rate is locked for the borrower.
All fees can also be lumped into one category, which is called the origination fee. This fee is an allowed charge and can take the place of almost any fees the lender charges. Rather than itemizing the charges on the HUD-1 Settlement Statement, the lender can charge a percentage, such as 1 point on the loan. On a $200,000 that would equal $2,000 and could take the place of many individual charges.
Closing costs you Will Pay
On the average VA loan, you will pay the following charges:
- Credit reporting
- Title Search
- Survey fees
- Recording or filing fees
- Property taxes and/or escrow
- Hazard insurance and/or escrow
- VA Funding Fee (a percentage of your loan amount that goes to the VA)
Before you close on a VA loan, make sure to accurately check the Good Faith Estimate, the disclosure you receive when you apply for the loan, as well as the HUD-1 Settlement Statement to ensure that you understand every cost you are being charged and that they are allowed. If you need help getting your closing costs paid, VA loans offer the most flexibility in terms of allowing others to pay them and/or wrapping them into your total loan amount in order to purchase a home.