It's important to take VA closing costs into consideration when planning to purchase a home. Just because you don't need to make a down payment with a VA loan doesn't mean your mortgage won't come with additional expenses.
However, VA buyers have some protections and benefits when it comes to these expenses, too.
How Much are VA Closing Costs?
Closing costs typically end up falling somewhere between 3% and 5% of the total loan amount. For example, if you use a $350,000 VA loan to purchase a home, the closing costs would likely fall between $10,500 and $17,500.
A buyer’s total costs and fees can vary depending on a host of factors outside the control of lenders, from property taxes and title insurance to homeowners insurance and more. The VA actually limits what lenders can charge VA buyers.
What is Included in VA Closing Costs?
VA loan closing costs can include a variety of expenses such as:
Recording fee: The cost for the government recording agency to register the real estate transaction
Title examination and insurance: A title examination and insurance to protect the buyer and lender against financial losses due to title defects
VA appraisal fee: The cost to have a property's value and condition appraised by an independent VA appraiser
Hazard insurance: Advanced payments for home insurance coverage that protects the property against damage and destruction; typically six months to a year's worth of payments are made at closing
Real estate taxes: Advanced property tax payments required by your lender
State and local taxes: Payment of any state and local taxes that are owed in the real estate transaction
Credit report: The cost to pull your credit reports
VA funding fee: A fee charged by the VA to help fund the program, ranging from 2.3% to 3.6% on a purchase. Veterans receiving service-connected disability compensation and select others are exempt from this fee.
Loan origination fee: A fee charged by lenders to cover the administrative costs of processing a loan. This fee cannot exceed 1% of the loan amount.
Loan discount points: Discount points you can buy to lower your interest rate
However, not all fees are paid by the buyer. In fact, there are specific costs the buyer isn't allowed to pay known as non-allowable fees.
Sellers in a VA purchase transaction can pay all the buyer’s loan-related closing costs and up to 4% in concessions, which can cover additional costs and fees associated with the purchase.
Initial Loan Estimate
You'll be able to get an idea of your closing costs from your mortgage lender as they are required to provide you with an Initial Loan Estimate. This estimate provides a sense of the closing costs you might need to pay. These are typically early estimates, particularly for third-party costs and fees that lenders can’t control.
Can VA Closing Costs be Rolled into the Loan?
The only closing cost that can truly be rolled into your VA purchase loan is the VA funding fee. All other closing costs will need to be paid at closing.
The VA funding fee is charged by the VA to help offset the costs of the loan program. The amount varies depending on factors like how many VA loans you've had, your down payment amount, and the VA loan type you're getting. For a purchase loan, the VA funding fee is 2.3%for first-time users of the benefit and 3.6% for all subsequent uses.
How to Negotiate Seller Paid VA Closing Costs
It's not unusual for buyers to work with their agents to negotiate for sellers to pay certain closing costs. Buyers can ask the seller outright to pay these costs and fees from the sale proceeds. In some cases, that can mean building those costs into your offer.
For example, say the property is listed at $170,000 and your closing costs are $5,000. You could increase your offer to $175,000 and have the seller use the sale proceeds toward your closing costs. The net profit would still be $170,000 for the seller. However, the home will have to appraise for at least $175,000 to get that loan amount from your lender. If the appraisal comes out to $170,000, the extra $5,000 would again have to come out of your pocket.
In a buyer's market, where demand is low and supply is high, you'll have more leverage. You could make an offer requiring the seller to cover some of the closing costs. But in a competitive market, this tactic won't likely go over well. It'll be important to speak with your real estate agent to gauge the market and formulate the best approach.
The Bottom Line with VA Closing Costs
When you're planning to get a VA loan, be sure to factor closing costs into the equation. Typically, they run 3% to 5% of the loan amount. That said, they may not all fall on you; there are ways you can potentially avoid having to pay some of these fees.
First, check to see if you qualify for an exemption from the VA funding fee. Then, you can work with your real estate agent to try and negotiate a deal where the seller covers some or even all of the closing costs.