Privileges surrounding a VA loan's closing costs may be one of the less eye-catching benefits of this type of mortgage, but they can be extraordinarily helpful to a veteran, someone still serving or other eligible person who has limited resources when they're buying a home. Indeed, they can often make the difference between a purchase going ahead or failing.
But what are closing costs, and how can you, as someone who's buying a home with a VA loan, benefit from your new mortgage's special rules?
Your VA Loan's Closing Costs – What Are You Facing?
Although they may often be lower, closing costs on VA loans cover the same expenses as ones for other types of mortgages. So they'll pay things like your lender's charges for processing your loan ("origination fee"), the appraiser's fee, title insurance, your first year's hazard insurance and property taxes, and smaller expenses, such as those for accessing your credit report and recording your deed with the county. Depending on your eligibility, you may also have to pay a VA funding fee, and you may choose to pay "loan discount points," which are optional and buy you a slightly lower mortgage rate. All these add up, and can easily come to between 3 percent and 6 percent of the purchase price, depending on where you're buying.
Unlike with other mortgages, the rules of your VA loan cap your lender's loan origination fee at 1 percent of the loan amount. If it wants, it can itemize all the different fees and charges that make up the loan origination fee, but their total still can't exceed that 1 percent. In addition, those rules mean you can't be charged for fees levied by mortgage brokers, pest inspectors and a few others.
Your lender is legally obliged to provide you within three business days of your application with a Loan Estimate form that details what it thinks you're likely to pay on closing. The figures on that form must be as accurate as possible, but might still change later. However, any differences have to be explained and justified, and you'll get a final reckoning three days before closing.
Can You Make Your Seller Pay Your VA Loan's Closing Costs?
Short of turning up to open houses with your service-issue M4 carbine (best not), there's little you can make your seller do. But, especially if you're purchasing in a buyers' market (one where homes are selling slowly) and are in a position to move forward quickly, you may be able to strike a deal that sees the seller pay all or some of your closing costs. This is allowed under VA loan rules.
It's important to recognize that you're still reaching a mutually beneficial arrangement, and there's a good chance you could have bought the home at a lower price, had you not done the deal over closing costs. Remember, many sellers have asking prices that exceed what they're prepared to sell for, so all you're doing is taking the reduction in a different form. Still, many buyers with VA loans can and do get their sellers to help in this way, and it can make a lot of sense for those who are low on cash.
One caveat: the home is still going to be appraised, and the price you agree to pay can't exceed the property's market value.
How to Minimize Your Closing Costs
First up, check to see if you're eligible to have your closing costs covered by a grant from the Military Housing Assistance Fund or a similar charity. These are gifts (not loans) that are funded by patriotic Americans who wish to thank you for your service. Given the sacrifices made by those who serve and the pay they receive, you may think it would be churlish to refuse.
But, if you're ineligible or prefer not to apply for grants, there are other things you can do to reduce your closing costs:
- Check to see if the people and companies providing your closing services offer military discounts. Some do, but you may have to ask to receive them.
- Shop around. You really should get multiple VA mortgage offers. When you receive them, look at the different closing costs as well as the mortgage rates. You want the best overall deal.
- Don't always go with your lenders' service providers. For example, you may be able to find your own title insurance cheaper.
- Negotiate with your candidate lenders. Go through the closing costs on your Loan Estimate line by line with your lender, questioning everything and seeing where savings can be made. Don't be afraid to play one lender off against another based on cost differences in your multiple Loan Estimates.
- Close at the end of the month. If you close at the start of the month, interest on your loan will be added to your closing costs for each day until the end of that month when your first payment's due. Close the day before that due date, and you'll have to find only one day's interest.
That may seem like a lot of work, but you're in a phase of your life when every dollar counts. And, even if you're not struggling to keep your financial show on the road, everything you save on your closing costs can go toward buying nice things to fill your new home.