VA loans have the distinct advantage of the no down payment requirement. Borrowers can get as much as a 100% LTV on their VA loan. What you might not know, though, is this isn’t the only benefit. VA borrowers are also eligible for limited closing costs. The VA strictly monitors which closing costs borrowers pay, which helps to keep your closing costs down.
So which closing costs can a borrower pay and what happens to the rest of the closing costs? Keep reading to find out the details.
The Borrower Paid Closing Costs
The VA does allow a good number of closing costs to be paid by the borrower. These closing costs include:
- Origination fee – The origination fee cannot exceed 1% of the loan amount. If you borrow $200,000, your origination fee cannot exceed $2,000.
- Credit report – Lenders can charge borrowers the fee that the lender pays to pull your tri-merged credit report.
- Appraisal – You can pay the appraiser that determines if the home is worth enough for the lender to write the VA loan for you. This is usually between $400 and $500.
- Title insurance – At a minimum, you’ll need lender’s title insurance. This protects the lender should someone come back and claim ownership of your property. You can also buy an owner’s policy, but it’s not required.
- Recording fee – This is the fee that your county charges in order to record the sale of your home into the public records.
- Survey fee – This is the cost of a surveyor coming out to the property and conducting the survey or measurements of the property and its boundaries.
- Prepaid interest – If you close on your loan before the last day of the month, you’ll have to pay interest for the remaining days of the month.
- Real estate taxes – If you owe any portion of the real estate taxes that are due and payable or will be due soon, you can pay them at the closing.
- Hazard insurance premiums – You will typically need the first 12 months of hazard insurance paid for at the closing.
- VA funding fee – Every veteran (except disabled veterans approved by the VA) pay a funding fee. Veterans of the regular military pay 2.15% of the loan amount upfront and veterans of the Reserves or National Guard pay 2.4% of the loan amount.
Who Pays the Other Fees?
You might find yourself wondering what about the other closing costs? You know there are standard closing costs, such as underwriting fees, processing fees, and attorney fees, just to name a few. The VA does not allow veterans to pay these fees as an itemized charge.
If the lender wants you to pay them, the only way you can is to lump them into the 1% origination fee. This way, you pay the fees, but they aren’t itemized, causing issues.
Other ways you can get the non-allowed closing fees paid include:
- Seller credit – Some sellers are willing to give a seller credit to help a VA borrower get the home they want. You must negotiate this during the purchase contract negotiations, though, as it must be an official part of the contract.
- Lender credit – Some lenders are willing to cover the costs that the VA doesn’t allow in exchange for a higher interest rate. Typically, you’ll see a 0.5% difference in the interest rate when you opt for the lender credit.
In fact, if you want to go for the lender credit, you can even ask the lender for a ‘no closing cost loan.’ This means the lender covers all closing costs and in return, you take a higher interest rate. This may be a good option if you know you aren’t going to stay in the home forever. You can afford to pay the slightly higher interest rate for a short period in exchange for not having to come up with any money for closing costs when you buy the home.
As you can see, there are a variety of ways to get the closing costs paid on a VA loan. It’s up to you to figure out how you want to make it work. If you have money to pay at the closing, you may want to pay them yourself and get the lowest interest rate possible. If you don’t have the money at the closing or you would rather save your money, you may opt for the lender or seller credit and take the higher interest rate and/or purchase price so that you don’t have to pay the closing costs.