VA Loan Closing Costs: What You Need to Know
Mortgages backed by the U.S. Department of Veterans Affairs (VA) provide active-duty servicemembers, veterans and eligible surviving spouses with affordable home financing. But, like other types of mortgages, you still need to pay VA loan closing costs.
VA loans have unique fees as well as specific rules about fees that borrowers can’t be charged for. Here’s what to know about VA loan closing costs before you apply.
- How much are VA loan closing costs?
- What’s included in VA closing costs
- Who pays closing costs for a VA loan?
How much are VA loan closing costs?
You’ll typically pay 2% to 6% in closing costs to take out a mortgage, depending on the size of your loan. In 2018, borrowers paid an average of $6,751 in closing costs for VA loans, according to a new report from the Consumer Financial Protection Bureau analyzing Home Mortgage Disclosure Act data from that year.
The basic costs of getting approved for a VA home loan are similar to what you’ll find with any other type of mortgage loan. A VA-approved lender still has to verify your income and assets, check your credit and order an appraisal to verify the home’s value.
One unique VA loan fee is the VA funding fee. The funding fee is used to offset the cost of the VA loan program to taxpayers. You’ll need to know how much your funding fee will be when you tally up what’s included in your total VA loan closing cost estimate.
What’s included in VA closing costs
To help minimize costs, the VA imposes a 1% cap on the percentage of VA loan closing costs a lender can charge. Because the funding fee makes up such a large portion of the total costs of a VA loan, we’ll explain how the fee is charged next.
The VA funding fee is charged as a percentage of your loan amount. For example, a first-time VA mortgage borrower would pay a $4,600 (2.3%) funding fee to buy a $200,000 home with no down payment.
Funding fees rose in 2020 for anyone buying or refinancing a home with a VA loan except for the VA interest rate reduction refinance loan (IRRRL), which we’ll explain later. The table below shows the percentages charged based on four factors — type of military service, the purpose of the loan, down payment amount and whether the VA home loan benefit has been used before.
|Type of military service||Purpose of loan||Down payment||First-time user fee||Subsequent user fee|
|Active duty, Reserves and National Guard||Purchase||0%||2.3%||3.6%|
|Purchase||5% to 9%||1.65%||1.65%|
|Purchase||10% or more||1.4%||1.4%|
|Cash-out and regular refinance||90% maximum LTV (for cash-out)||2.3%||3.6%|
|IRRRL||No equity required||0.5%||0.5%|
The funding fee is typically financed into your loan for a purchase, regardless of your down payment amount. The funding fee is handled differently for VA refinance loans, and the percentage may be lower on specialized VA refi programs.
Cash-out funding fee. Replacing your current loan with a larger loan amount and pocketing the difference is known as a cash-out refinance. After changes to VA cash-out refinances in 2019, VA-approved lenders now allow you tap 90% of the value of your home. The 2.3% to 3.6% funding fee can be financed as long as the total loan amount, plus the funding fee, doesn’t exceed 90%. Prior to this change, the VA allowed up to 100% cash-out refinancing.
VA IRRRL. You could lower your rate without documenting your income or getting a home appraisal with a VA IRRRL, also called a VA streamline refinance. The funding fee is much lower (0.5%) and can be rolled into the loan.
Funding fee waiver. VA home loan closing costs for disabled veterans may be lower if they’re eligible for a funding fee exemption for service-related disabilities. Information about your eligibility for the waiver can be found by checking your certificate of eligibility online or reviewing the status of a pending disability claim.
VA appraisal fees
Getting your home appraised for a VA loan can come with a higher price tag. That’s because the VA sets the appraisal fee depending on where you live. To give you an idea of how much costs can vary, the VA appraisal fee for a single-family home in Arizona will cost $600 versus $500 for a similar home in Alabama.
VA inspection fee
Depending on where you live, the VA may require inspections for termites or ask for a report from a local health authority to confirm the septic system is in good shape. These specialized inspection requirements vary by state.
Closing costs within the 1% maximum VA loan origination fee
To keep borrowers from being overcharged, lenders cannot charge more than a 1% VA loan origination fee of the total loan amount. Below is a list of fees you’ll see within the 1% origination limit.
- Origination fee. Lenders charge a percentage of your loan amount to cover loan officer commissions and expenses to process and approve your loan.
- Credit report. The cost of accessing your credit scores and credit history.
- Flood certification. Fee for checking if your property is in a federal flood zone, and whether or not flood insurance is needed.
- Tax monitoring. Lenders charge a set-up cost for a service that checks that you’re making on-time property tax payments.
Other VA loan closing costs
Here’s a look at other VA loan fees.
- Lender’s title insurance. You’ll buy a lender’s title policy to protect your lender from title disputes such as tax liens or judgments.
- Discount points. You can pay an upfront fee as a percentage of your loan amount to get a lower interest rate.
- Escrow account. Your homeowners insurance and property taxes are usually paid as part of your monthly payment. Funds are collected at closing to set up the escrow account.
- Prepaid fees. You may need to prepay a portion of your ongoing homeowner’s insurance and property tax costs at closing.
Who pays closing costs for a VA loan?
While many borrowers pay closing cost themselves, VA borrowers have a few options to get those expenses covered:
- Request that the seller pays them. The VA seller concession maximum cannot exceed 4% of your loan amount. The seller can even pay the VA funding fee, which helps you avoid financing the fee over the term of your loan. For example, a second-time VA borrower putting zero down on a $300,000 house could ask the seller to pay some or all of the $10,800 funding fee.
- Ask for a donor gift. You can get a gift for your closing costs, as long as the donor completes a gift letter and shows proof of funds.
- Apply for military closing cost assistance. Depending on where you live, you may be eligible for closing cost assistance. Income and family-size limits apply, so read the fine print before applying.
- Roll closing costs into the loan amount. The VA funding fee can be added to your loan amount for any type of VA loan. However, unless you’re refinancing, closing costs cannot be added to the loan amount.
Additional caveats for VA loan closing costs
It’s worth noting that before you can do a VA refinance, your lender has to prove there’s a benefit by ensuring you’ll break even on the closing costs within 36 months or less. Breakeven refers to the time it takes for you to recoup closing costs on a refinance.
Finally, the VA prevents lenders from charging certain fees to borrowers, known as “non-allowable fees.” These include:
- Attorney fees. Fees charged by an attorney for preparing closing paperwork. Some states require that an attorney acts as the closing agent for a mortgage transaction.
- Brokerage fees. Fees related to the services of a real estate professional.
- Prepayment penalties. A charge related to paying a loan down or off before a set time period.