One of the many advantages of a VA loan is the VA closing costs benefit, which makes the loan much more affordable than conventional borrowing. Along with limiting what service members have to pay, the benefits also greatly reduce the fees and extra costs that traditional loans carry as part of a program that was created to make home ownership more accessible to service members.
Here are three key aspects of VA closing costs that veterans, active-duty service members, and sellers should know when negotiating the closings costs for the purchase of a house.
What the Buyer Doesn't Pay
One of the biggest incentives for VA loans is that they require no down payment, a cost necessary for many traditional loans that can run tens of thousands of dollars. On top of that, VA loans restrict buyers from paying most VA closing costs and fees, which are the costs associated with processing the loan. Instead, the seller, lender, or real estate agent picks up the costs of the VA loan.
According to the Department of Veterans Affairs' "non-allowable fees" list, veteran and active-military service members cannot pay the following fees:
- Penalties for loan prepayment
- Attorney fees not related to the title
- Excessive recording fees
- Broker fees or real estate agent commissions
In 41 states, borrowers also cannot pay for pest inspections related to the purchase of the home.
Borrowers can get an estimate for what they'll pay in VA closing costs when they fill out a full loan application, which will include the address of the house they want to buy. Within three days, the potential lender will supply a loan estimate, which will include closing costs. Borrowers do not have to work with the lender that provides the estimate, but it can be a useful tool when negotiating with the seller.
What the Seller Can Pay
Some costs and fees generally are negotiable in a home purchase involving a VA loan, and the seller may end up absorbing some of them.
For example, a seller can agree to cover all the buyer's VA closing costs related to the mortgage, which can include title work, the appraisal, and the loan origination fee, and pay as much as 4 percent in "concessions." These additional costs could be everything from homeowners insurance to the buyer's collections or judgments that need to be paid off.
Sellers should keep in mind that many borrowers using the VA loan program need help paying closing costs to afford the home. While sellers aren't required to pay any of the costs, they may want to offer some assistance to close the deal. The VA does not limit how much a seller can pay toward a buyer's closing costs.
How to Afford the VA Funding Fee
The VA funding fee partially funds the VA home loan program. The fee is based on the buyer's disability status, service history, and any prior use of VA loan benefits. The one-time fee can be paid upfront or to the Department of Veterans Affairs directly every time a borrower uses the program to buy a home or refinance a loan, or it can be rolled into the monthly mortgage payment. The money is used to offset any loans that go into default, which keeps taxpayer costs low and the program viable.
About a third of borrowers could be exempt from the fee due to service-related disabilities. The VA makes the final decision on which applicants don't have to pay the funding fee.
The closing costs rules for VA loans allow plenty of room for sellers and buyers to negotiate who pays which fees and costs associated with completing the purchase. When sellers and buyers work together, the VA loan program can greatly benefit veterans and military families who otherwise wouldn't be able to purchase a home through a traditional loan.