VA Home Loan Fees: What the Borrower Is Not Responsible for Paying
Veterans Affairs (VA) home loans provide veterans with an assortment of benefits. Along with no down payment requirements and competitive interest rates, the VA places limits on what lenders can charge borrowers on loan fees. In the mortgage industry, the term “loan fees” has many different aliases. Some in the industry refer to fees as “closing costs,” while others call them “settlement fees.”
What’s important for this discussion is there’s an array of fees and costs that are part of completing the mortgage application process. What’s also important is that no matter what you call a fee or cost, you will be required to pay some and some you won’t. Ultimately, the VA is trying to make homeownership easier for every veteran by limiting the fees lenders can charge.
In this article, we’ll discuss the loan fees you are and are not responsible for paying, as well as other requirements that come with your VA Home Loan benefit. We’ll also touch on your entitlement for this year and how much money it lets you borrow.
VA mortgage fees and escrow requirements
Every mortgage ever originated probably had some type of closing costs or fees that’s required before finalizing the loan. Unfortunately, VA home loans are no exception.
The problem is closing costs can get tricky since the actual fees you will pay depend on a host of factors, including where you live, your lender, your income and a myriad of other possibilities.
You can expect to pay roughly 3% to 5% of your total VA mortgage amount in loan fees, but that’s just an average — it could cost more or less.
Let’s break down the fees that lenders can charge and what the VA allows you to pay.
Understanding VA mortgage loan fees
The Department of Veterans Affairs gives lenders two options for charging fees: Lenders can charge “itemized” fees not to exceed 1% of your loan amount, or they can charge a fixed amount of 1% of the loan amount. The VA also states that the fees must be customary and reasonable, which essentially means lenders can’t “steer” you into a high-cost loan that is not suited for your needs.
Here’s an important tip about VA loan fees — the lender is only allowed to charge you 1% in fees to cover the cost of processing, underwriting and originating your loan.
“The VA allows lenders to charge a flat 1% fee, which is intended to cover the costs of originating, processing and underwriting the loan, along with reasonable and customary amounts for specific itemized fees and charges designated by the VA,” explained Chris Birk, the director of education at Veterans United Home Loans.
“Some of those itemized fees and charges include the appraisal fee, recording fees, credit reports and prepaid amounts for taxes and homeowners insurance.”
Let’s take a look at the most common fees you can expect to pay on a VA loan:
|Common VA Loan Fees|
|Appraisal||The VA requires you to obtain an appraisal from a certified VA appraiser, and the cost will vary based on where you live. The average cost is $300 to $500, and most lenders require you to pay the appraisal fee upfront.|
|Credit Report||The lender can charge you for a copy of your credit report, but it shouldn’t exceed $50.|
|Recording Fees||The cost to record your mortgage with your local government.|
|Prepaid Fees||These fees include taxes and prepaid interest.|
|Home Insurance||The cost to insure your home from damages.|
|Flood Zone Determination||The cost to determine whether your home is in a flood zone.|
|Title Insurance / Title Search||Title insurance protects the lender from any liens that may arise on the property’s title. A title search ensures no liens or judgments are currently recorded on the subject property’s title.|
|Special Mailing Fees for Refinancing Loans||Fees for express mail or FedEx mail|
|Mortgage Electronic Registration Systems (MERS)||A one-time fee to track who has a beneficial interest in your loan, such as the company who services your mortgage or the bank/investor who owns your mortgage.|
Seller concessions vs. closing costs
“Seller concessions” is a phrase used to describe how much a seller can pay toward some of the fees associated with your purchase. For VA loans, a seller can’t pay more than 4% of the loan amount. However, the VA doesn’t include lender closing costs, such as processing and underwriting fees, in the 4% limit.
Keep in mind, however, that what sellers may pay in concessions are the fees that fall outside of what is generally considered the normal scope of lender closing costs. Additionally, the seller can only pay a total of up to 4% of the loan amount. Fees typically include the VA funding fee, prepaid interest, taxes and insurance, discount points and paying off any judgments or credit balances you may have that’s preventing you from buying.
As we’ve discussed, VA-insured loans offer some of the most lenient guidelines in the mortgage industry, and setting up escrow accounts to pay taxes and insurance are certainly on the list. Like many conventional loans, you’ll need to establish an escrow account with your lender if your down payment is less than 20%. With VA loans, there is no requirement to open an escrow account with your lender.
However, the VA doesn’t place any restrictions on lenders to set up an escrow account for your insurance and taxes. This basically means that lenders can escrow for taxes and insurance if they choose to do so. The only requirement by the VA is that lenders must follow the applicable laws regarding escrow accounts.
VA funding fees
Since the VA tries to keep mortgage costs reasonable for veterans, the agency requires you to pay what is called a VA funding fee. This is a mandatory fee that goes directly to the VA and, for the majority of borrowers, the fee is 2.15% of the mortgage amount. However, there are some exceptions where you might need to pay more based on the loan type, down payments and other factors. Let’s look at the VA funding fee tables:
|Veteran Type||Down Payment||First Time Use||Subsequent Use|
5% or more
10% or more
5% or more
10% or more
|Cash-out Refinance Loan|
|Veteran Type||First Time Use||Subsequent Use|
|Loan Type||First-time Use or Subsequent Use|
|Interest-rate Reduction Loans (IRRLs)||0.5%|
If you feel the VA funding fee could prevent you from bringing enough money to the table when it’s time for closing, the VA will allow you to include the fee in your loan amount. However, no other fees can be included in your loan amount for purchase/construction/cash-out loans. The VA does allow you to include other charges and fees into your loan amount on refinances.
VA non-allowable mortgage fees
One of the main features of VA-guaranteed loans is the limit the department places on lender fees. The majority of traditional mortgage borrowers must pay certain fees that go toward the cost of third-party vendors and other lender fees. For example, regular mortgage borrowers would have to pay a fee if they used a broker to get their mortgage or pay for an appraisal ordered by the lender.
As a veteran, the VA doesn’t allow lenders to charge you for lender fees and several other fees that are common with conventional mortgages. Here are the fees that lenders can’t charge you (non-allowable fees):
- mortgage broker commissions or broker fees
- attorney fees
- real estate agent fees or commissions
- application fees
- fees to prepare loan estimate
- lender inspections
- rate-lock fees
- tax service fees
- flood zone determination fees made by the VA appraiser or lender
- prepayment penalties
- appraisal fees requested by lender (or any other entity that isn’t the seller or veteran)
“Non-allowable fees are meant to protect veterans from paying for services that provide little to no benefit to them, explained Birk. He also said that additional clarity is often required when it comes to non-allowable fees.
“For example, the lender cannot charge a VA borrower directly for attorney’s fees incurred by the lender. The borrower can pay reasonable fees for title examination work and title insurance, but not a separate attorney fee associated with the title work,” Birk said.
VA loan entitlements for 2018
As of 2018, your basic entitlement insures up to $36,000 or 25% of any loan amount up to $144,000, whichever is less. Lenders traditionally lend you up to four times your basic entitlement of $36,000 if you’re not making a down payment. However, the median home price of many locations throughout the U.S. is more than $144,000, so the VA adds an additional “layer” of coverage known as your bonus entitlement.
As of 2018, your bonus entitlement gives you $77,275 in coverage on any loan amount up to $309,100. However, borrowing isn’t limited to $309,100 — you can borrow up to $453,100. What the VA does is add the total loan amounts from your basic and bonus entitlement ($144,000 + $309,100 = $453,100), which is the national conforming loan limit established by the Federal Housing Financing Agency (FHFA). Additionally, some counties in the U.S. are classified as “high-cost counties,” so the FHFA has higher conforming loan limits for these counties.
You can borrow as much as you want so long as you receive an approval from a lender, which means you can borrow more than $453,100. However, the VA will not insure the financing you receive that goes beyond $453,100. You’ll have to make up the difference by making a down payment.
Understanding VA loan fees can be pretty complicated. The biggest takeaways from this article should be the limits the VA places on lenders for the cost to underwrite, process and originate your loan. Whether they decide to itemize these costs or charge you a flat fee, the lender’s closing costs can’t exceed 1% of your loan amount.
If you can tell the difference between the lender’s cost to process your loan and third-party costs, you’ll be a step ahead of many mortgage shoppers who are searching for VA-backed home loans.