Buying a home is a significant life milestone, and a VA loan makes it easier for qualifying veterans, service members, and spouses to get financing. While these loans have several perks, such as no private mortgage insurance and the possibility of not needing a down payment, there are a few costs involved. This guide will unveil VA loan closing costs and other fees you can expect.
What Are VA Loan Closing Costs?
VA loan closing costs are the expenses you’ll have to pay before finalizing the loan. It’s the final obstacle to owning a home, and lenders wait until the very end to bring up these costs. Closing costs consist of the origination fee, appraisal, and other fees incurred during the loan application process.
Why It’s Important to Be Informed About VA Loan Closing Costs
Some borrowers pay closing costs from out of pocket, and a high bill can catch many people by surprise. You may also have the option to roll the closing costs into your VA loan, but it’s good to prepare for them in advance. Paying your closing costs right away prevents interest from accumulating.
Understanding the Types of VA Loan Closing Costs
VA loans have several closing costs that come due when it’s time to finalize the loan. The funding fee is a closing cost that is exclusive to VA loans. This cost helps fund the VA program, which enables zero down payment options and doesn’t come with any private mortgage insurance. You will also have to pay the closing costs you would expect, such as origination fees, appraisal fees, and other costs that are associated with any mortgage.
Mandatory Costs
While some costs are optional, these are some of the expenses that you must pay as a part of the home-buying process.
Origination Fees
Origination fees represent the costs of initiating a loan. This fee ranges from 1% to 6% of the loan’s balance.
VA Funding Fee
The VA funding fee helps to fund the VA program. This fee ranges from 1.25% to 3.3% of the loan’s balance. You can end up with a lower VA funding fee if you make a higher down payment.
Credit Report Fee
Credit reporting agencies charge a small fee for letting the lender access your credit report. Lenders will review this information to verify if you can make on-time payments. Your credit score also plays a key role in determining your interest rate. VA lenders will pass the credit report fee to borrowers.
Optional Costs
These costs are optional, but most homeowners should add these expenses to their home-buying budget. It’s very risky to omit these small costs.
Home Inspection Fee
Paying a few hundred dollars for a home inspector to look over the property can save you many headaches and help you narrow your choices. Inspectors can give you an idea of what type of renovations may be necessary if you buy the property.
Survey Fee
Surveyors assess a property’s condition and value. The survey fee usually costs a few hundred dollars and can help you decide if the property presents a good buying opportunity.
Breakdown of Specific VA Loan Closing Costs
VA loans have several closing costs that will impact the total cost of borrowing money. These are the different expenses and how they compare.
Loan Origination Fees
Loan origination fees represent the cost of doing business. You’ll see loan origination fees for various financial products.
What They Cover
Loan origination fees cover the costs of initiating the application, underwriting, home appraisal, and other administrative costs.
How Much They Typically Cost
Loan origination fees can range from 1% to 6% of your loan’s balance. A higher loan balance should reduce the total percentage.
VA Funding Fee
The VA funding fee is exclusive to the VA program.
Explanation of the Funding Fee
This funding fee allows the VA to offer home loans with no private mortgage insurance that do not require any down payments. Having borrowers fund the program minimizes the burden on taxpayers.
Different Rates Based on Service and Down Payment
The VA funding fee ranges from 1.25% to 3.3% of the loan’s amount. The amount you pay depends on your down payment:
- 0%-5% down: 3.3% (or 2.15% if you are using a VA loan for the first time)
- 5%-10% down: 1.5%
- 10%+ down: 1.25%
A cash-out refinance has a 2.15% funding fee for the first use and a 3.3% VA funding fee for any additional uses. VA IRRRL loans only have a 0.5% VA funding fee.
- You do not have to pay the VA funding fee if one of the following applies.
- You have a Purple Heart.
- You are a surviving spouse who is eligible for a VA loan.
- You are a veteran who receives compensation for a service-connected disability or would receive it if you didn’t receive retirement pay.
- You are a veteran who is eligible to receive compensation based on a pre-discharge exam or review
- You are a veteran on active duty and eligible for compensation.
Appraisal Fee
The appraisal fee is a required expense for the VA loan application process.
Purpose of the Appraisal
VA lenders use an appraisal to determine a property’s value. Knowing an updated value makes it easier for them to know how much they have to lend if the applicant gets approved. A mortgage lender can use information from the appraisal to commit to the deal, request a higher down payment, or walk away from it.
Average Cost of Appraisal
Most appraisals cost a few hundred dollars. Larger properties will often have more expensive appraisals.
Title Fees
You’ll have to pay a title fee for any mortgage. Here’s how the expense works.
Title Search
The lender uses a title search to verify the rightful owner of the property.
Title Insurance
This insurance policy protects the property’s owner from any false claims of ownership at the time of sale.
Recording Fees
Recording fees are a mandatory fee for all mortgages.
What They Are
States and local agencies oversee that an ownership transfer has taken place. Lenders charge recording fees as a part of doing business in the area and confirming that a property is switching hands.
Typical Expenses
Recording fees typically cost around $100 for each mortgage, but the cost can be slightly higher or lower depending on where you live.
Strategies for Reducing VA Loan Closing Costs
VA loan closing costs can get expensive, but you can use these strategies to keep your expenses low.
Lower or Eliminate Costs
You can negotiate lower costs or make a higher down payment. The elevated down payment will reduce your VA funding fee. Borrowers can also compare multiple lenders and ask for discounts on the origination fee.
Seller Concessions
You can request that the seller assist with some or all of the closing costs. It’s easier to ask the seller to help out during a buyer’s market, but you may also get some financial help during a seller’s market. You never know if you don’t ask.
Potential for Lender Credits
Some lenders give out credits that reduce your closing costs. However, if you accept a lender credit, you are agreeing to pay a higher interest rate for the duration of your loan.
Benefits of Shopping Around and Comparing Lender Fees
Shopping around can help you save a lot of money on fees and interest rates. Reviewing multiple choices can help you find a good deal. Lenders may also feel inclined to offer lower fees and rates if they know you are looking at other options.
Aside from comparing lender fees, you should also take into account the level of customer service provided by the lender, their experience with VA loans, and their overall reputation in the industry. As a veteran-owned bank, you can be assured that The Federal Savings Bank has your best interest in mind.
With The Federal Savings Bank, you can trust that you are working with a reputable and trusted lender. Visit their website today to learn more about their VA loan options and start the process of becoming a homeowner with confidence.
Negotiating Better Terms
A high credit score and low DTI ratio are some of the talking points you can use to negotiate better terms for your loan. You have to demonstrate your ability to comfortably make monthly payments and generate a return on the lender’s investment. If a lender sees you as less risky, the company may decide to give you a more favorable rate and term to keep you on board.
Where to Get Help for VA Loan Closing Cost
These are some of the places you can go to receive assistance with VA closing costs.
VA Seller Concessions
The seller may make some concessions and cover some or all of your closing costs.
Grants and Programs for Veterans
Veterans can find several grants and programs that provide the extra cash they need to afford closing costs.
State-Specific Assistance Programs
Many states have assistance programs for veterans and first-time homeowners that can help with the down payment and closing costs. A higher down payment can reduce your VA funding fee as well.
What Else to Expect and Prepare for Closing Day
The closing day should go smoothly if you bring all of the necessary paperwork. You should also review the terms and conditions one final time to ensure they match up with what you expected.
