For veterans and active military members, VA loans can be one of the best pathways to homeownership, offering significant benefits such as no down payment requirements and no need for private mortgage insurance (PMI).
However, an often overlooked aspect of the home buying process with these mortgages is the VA closing costs.
Neglecting to budget or understanding these costs means a buyer may not be fully prepared when the final tally is ready to be paid.
Purchasing a home has many aspects to it, and VA closing costs need to be part of that calculation.
Let’s break down what is involved in VA closing costs, how they work, and how you can prepare for them.
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Why should homebuyers choose a VA Loan?
When it comes to purchasing a home for yourself and your family, VA loans are one of the go-to choices for those who have served in the military.
Why? Because the Department of Veterans Affairs guarantees these loans.
That guarantee offers lenders a bigger layer of security that can greatly enhance their purchase options and make homebuying more affordable in the short and long term.
Understanding the role of the VA and these foundational advantages is key to appreciating the full value of VA loans.
Understanding VA closing costs
All mortgages will have some form of closing costs—encompassing a variety of fees and expenses incurred during the homebuying process.
For VA loans, closing costs include (but are not limited to):
- Appraisal fees
- Title insurance
- Origination fees
- Recording fees
While the VA loan program offers several cost-saving advantages, buyers are still responsible for these closing costs—which can vary widely depending on the property and location.
Failing to budget for these costs may mean being left out in the cold when it comes time to buy.
How VA closing costs differ from other loans
Comparatively, VA closing costs share many similarities with those associated with conventional and FHA loans.
However, the VA loan program includes specific benefits designed to limit out-of-pocket expenses for veterans.
For instance, the VA caps certain fees that lenders can charge buyers, such as the loan origination fee, which is limited to 1% of the loan amount. This cap helps keep closing costs manageable for VA loan borrowers.
Who pays for what: VA loan closing costs breakdown
VA loan closing costs are a shared responsibility between buyers and sellers.
The buyer typically covers:
- The appraisal fee
- Credit report fee
- Title insurance
- Origination fees
- Possibly a few others
However, the VA allows sellers to pay up to 4% of the total loan amount towards the buyer’s closing costs, offering a negotiation point that can significantly reduce the buyer’s out-of-pocket expenses.
VA funding fee
Additionally, the VA funding fee, a one-time fee paid to the Department of Veterans Affairs, varies depending on the down payment and whether the borrower has used their VA loan benefit before.
Some veterans may also be exempt from this fee, such as those receiving VA disability compensation.
Strategies to reduce VA closing costs
Understanding how to navigate VA closing costs can significantly impact your out-of-pocket expenses.
One effective strategy is negotiating with the seller of your choice to pay a portion of your closing costs. This is often part of the purchase agreement and can cover items like the VA funding fee or title insurance.
Additionally, some lenders may offer credits toward closing costs in exchange for accepting a slightly higher interest rate, which can reduce initial expenses.
The role of lenders and negotiating fees
Lenders have a notable influence on certain variable closing costs, including origination fees and points.
As always, it’s advisable to shop around and compare offers from multiple VA-approved lenders.
Don’t hesitate to negotiate these fees or ask for lender credits toward closing costs.
Transparency about fees and flexibility on the lender’s part can make a substantial difference in the total cost.
Preparing for closing costs
Planning for closing costs should be an integral part of your homebuying budget.
- Begin by saving early, setting aside a portion of your income specifically for these expenses
- Utilize the loan estimate provided by your lender to get an idea of what your closing costs might be
The estimate is required by law to be given to you after applying for a loan—outlining estimated closing costs and loan terms.
Later, the closing disclosure will provide final details, allowing you to see the full picture before the closing date.
FAQs about VA closing costs
Q: Can VA closing costs be rolled into the loan?
A: The VA funding fee can be financed, but other closing costs generally need to be paid at closing, out of pocket.
Q: Are there limits to VA loan closing costs?
A: Yes, the VA caps certain fees lenders can charge veterans.
Q: Do I still have to pay closing costs with a VA loan?
A: Yes, while the VA loan program offers numerous benefits, borrowers are still responsible for certain closing costs.
VA closing costs: Conclusion
Like it or not, VA closing costs will be part of your homebuying process.
If you’re a veteran or active military member, you need to prepare for these costs.
By understanding these costs and exploring strategies to reduce them, you can make informed decisions that align with your financial goals.
Remember, these costs are part of securing a loan that offers significant long-term benefits, making them a worthwhile investment in your future home.
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Our advise is based on experience in the mortgage industry and we are dedicated to helping you achieve your goal of owning a home. We may receive compensation from partner banks when you view mortgage rates listed on our website.
