For cash-strapped military borrowers, a VA mortgage can be the answer to a prayer. Eligible military borrowers can get into a new home with no down payment, only a funding fee — an upfront charge that can be financed within your mortgage.
But borrowers without cash savings face a potential obstacle: closing costs, the big bill that includes lender’s fees, taxes, insurance and other services needed to transfer a property. Payment is due when you sign your loan papers. Luckily, there are ways around this problem. VA borrowers are exempt from some closing costs and have options for managing others.
How are VA closing costs different?
VA loans, which are guaranteed by the Department of Veterans Affairs, are issued by private lenders. Closing costs on veterans’ home loans aren’t much different from those on other mortgages — with two important exceptions, which can help VA borrowers limit the cash they’ll need at closing.
“Many VA borrowers have only been in the military for maybe three or four years. They don’t make a ton of money at that point and don’t have a lot of extra reserves,” says Jackie Runk, a loan officer with Kansas-based NBKC Bank.
Prohibits some fees. Lenders may not charge certain closing costs on VA loans — among them are a lender’s fee for attorney services, settlement charges, prepayment penalties and mortgage broker commissions.
Limits a lender’s origination charge. Lenders may not charge VA borrowers more than 1% of the loan amount as an origination fee. A lender can itemize origination fees, up to the 1% limit, or charge a flat 1% origination fee. With the flat rate, additional processing fees are not allowed.
How much are VA closing costs?
Closing costs on VA loans, as with other mortgages, will come to about 3% to 6% of the loan amount — or roughly $6,750 to $13,500 on a home priced at $225,000.
It’s easy to see what your closing costs will be. Lenders must send borrowers a three-page Loan Estimate form with the costs within three business days after you apply. A final form, the Closing Disclosure, with firm numbers, should reach you no later than three business days before the sale closes.
Also, you can compare just the lenders’ fees without applying for a loan: Ask lenders for an unofficial cost estimate, says Dan Stevens, NBKC Bank’s vice president of mortgage strategy.
Closing costs for a VA loan include:
A loan origination fee. This lender charge may be a flat fee or a handful of loan-related fees. It’s the lender’s price for preparing your loan. Either way, a VA loan origination fee may total no more than 1% of the loan amount.
Other fees. These include the VA funding fee and charges for a credit report, title insurance, taxes, homeowners and flood insurance, a survey, appraisal, government recording and insurance. Also included: any discount points to “buy down” your interest rate and prepaid amounts for mortgage interest and any homeowners association fees before your first monthly mortgage statement arrives.
Ways to limit out-of-pocket costs
Who pays for VA closing costs? A borrower, seller and lender may each have a role. Besides limiting closing costs with strategies such as comparison shopping and challenging lender fees, VA borrowers’ options include:
Roll the funding fee into the loan
The VA charges most borrowers a funding fee of from 1.4% to 3.6% of the loan amount for purchase or construction loans. Your exact fee will depend on your down payment and whether you’ve used a VA benefit before.
“The funding fee could be paid in cash at closing if you wanted to, but most veterans roll it into the loan,” Runk says. Adding it to your mortgage amount means you’ll pay more in interest overall.
The VA gives sellers two ways to help reduce your out-of-pocket costs for a home purchase:
Closing cost contributions. VA buyers can ask the seller to pay for — or share — some or all of your closing costs, including discount points, the VA appraisal, credit report, state and local taxes and recording fees.
Seller concessions. You also may ask a seller to pay other closing-related expenses, up to a limit of 4% of the loan amount. Called “concessions,” these expenses may include:
Some or all of your VA funding fee.
Property taxes and insurance.
Paying down your credit card balance or court judgment.
VA rules are complex, and an experienced VA lender can guide you.
Will negotiating work for you? That depends on your market. Runk says her VA clients — in Southern and Midwestern communities near military bases, where seller contributions are customary — usually win sellers’ help.
But where buyers are competing in tight markets, they have less clout. Bobby Archuleta, a broker with NPL Real Estate in Southern California specializing in helping VA buyers, says negotiating is more difficult in his market, although sellers sometimes will deal if their property has been on the market for a while.
Can you roll closing costs into your VA loan? No, says Archuleta, except for the funding fee, discussed above. But buyers can negotiate with lenders to purchase lender credits that can offset some closing costs. Lender credits will increase your interest rate, though, and rates and fees vary, so it pays to shop around.
Closing cost assistance programs
The VA’s “streamline” refinance — Interest Rate Reduction Refinance Loan, or IRRRL (pronounced “Earl”) — lets borrowers roll closing costs into the loan balance or cover them by accepting a higher interest rate.
You might even combine strategies for a no-cash closing. “I’ve had a few VA buyers actually get some of their earnest money deposit back at the close of escrow because they received lender and seller closing cost credits to cover all of their closing costs,” Archuleta says.