Who Pays VA Loan Closing Costs?

Certified Mortgage Advisor
NMLS 1701021
August 12, 2019

Who pays for the closing costs for VA loan

Today we're talking about VA loans, closing costs, and specifically who pays for the closing costs with the VA loan. So just like all other loans, VA loans have closing costs associated with them.

Closing cost is in every mortgage loan

Every single loan does and closing costs are just the grouping term that we use for any of the costs and fees that go into closing on a home. So it's everything from your appraisal to your insurance, to your taxes, to underwriting, to everything encompassed in the deal. It's not just one lender charging you a bunch of random fees. It's every party in the transaction, it's, what's going to cost to close on that deal.

So VA loans are very similar to other loans in terms of the closing costs that they have. There are a couple of things that are slightly different about VA loans that you'll see compared to some other ones.

1. VA Funding fee

So VA has a form of mortgage insurance called a funding fee. This means that it's the mortgage insurance paid upfront, and it's either paid as a fee or it's wrapped into the loan amount, which helps the VA continue to put out loans. This helps the VA also insure mortgages making sure that the VA loans have a lower rate.

So basically what happens is all of the funding feed money goes into its own kind of collection, this big pool of money that the VA now has. So in the future, if somebody defaults, the VA can pay the lender back in the money.

Why low rates with VA?

So since all of the loans are insured or backed by the government, it allows lenders to put out VA loans with really low rates and really great terms. So the funding fee helps you get a really good rate on VA loans and then also saves you from any monthly mortgage insurance, which is awesome, but the funding fee can be a little steep sometimes.

First time VA buyer: Pay or Wrap it

So if you're a first-time VA buyer, you're probably going to run into a funding fee of about 2.15%. Now, this is going to change. Depending on if this is your first time buying or your second time buying with a VA loan and how much you're putting down. But if your first-time buyer was 0%, it's going to be about 2.1 to 5%, and you can either pay this at closing, or you can wrap it into a loan. Most of the time people are going to wrap it into their loan.

Wrapping it to the loan, how?

And so the way this would work is if your, let's say your mortgage is a hundred thousand dollars, you could either pay $2,150 at closing for that funding fee or you just take out a mortgage for $102,150. That's normally what most people do is the easiest way to put that funding fee in there. So there are no upfront costs. So the funding fee can get wrapped into the loan.

What tour are not allowed with VA

Something else that you'll notice with VA is that you are not allowed to pay for the required termite inspection on a VA loan. So VA requires every home to have a termite inspection, which is great for you because you don't want your house to have termites.

And some people opt out of getting the full inspection because after you do multiple inspections, it can all add up. But VA wants to make sure you have a termite inspection and they are adamant about you not paying for it. So somebody else has to pay for your termite inspection. It's they're going to be the seller or it's going to be the realtors or somebody else that's normally who it's going to be, but it can not be you in the deal.

Termite inspection really isn't that much, it might run a hundred, $150. Shouldn't be too much more than that unless it's getting wrapped into your home inspection as well.

1% Origination Charges

Also, another thing that's kept is a loan origination charges are capped at 1%, which means you can't get charged a super high origination fee on your loan.

That's capped at 1% of your loan amount that there. So the VA protects you there from getting fees that are too high or too costly from a lender. And then finally what's a little bit different about VA is that your seller concessions are capped at 4% of the purchase price. So seller concessions, same thing as a seller credit, same thing as closing costs paid by the seller. We'll just call it a seller credit for now.

Seller Credit

A seller credit is basically where you take a percentage of the purchase price and you can use that to pay down the closing cost. So if you're buying a hundred thousand dollar house, you can ask for the seller to pay $4,000 towards your closing costs so they can pay $4,000 to pay down the taxes that are due, the insurance, your appraisal, and title work, and recording fees, they could pay all that down with that $4,000. And usually that 4% max should cover most of your closing costs which are going to be fantastic.

Conventional and FHA compared to VA

So it's 4% compared to other loans like conventional normally is anywhere from a 3% to 9%, and FHA allows you to ask for a 6% in seller credits. So the VA is a little different, and that they require for as the max, you can ask beneath that if you want to. But that's what you can get from the seller to pay that down.

VA's closing cost is almost the same

So VA loan closing costs really are pretty similar. You're not going to see them set up radically different than any other type of loan, just because all loans have pretty standard costs with them.

Closing cost fee is consist of different people or entities

Something to keep in mind is closing costs are not necessarily something that is just charged by the lender. Usually, your lender only has one or two fees in a mix of the whole list of fees that go on with closing real estate deals. Most of the closing costs fee we're run by our third parties.

So you have the county, you have an insurance company, you have a title company. You have an appraisal company, you have a credit report company. All of these are getting tied together. So they're all going to be pretty standard through what loan you go with. But VA does put in a couple of protections for you.

VA is going to be just an awesome loan. If you're a veteran, go with the VA loan, shop it around, make sure you're getting a good rate because it should, that's an insured loan, meaning you should be able to get some really good rates in terms with them as well.

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