Anytime you get financing for a home, whether as part of a purchase loan or a refinance, you have closing costs to contend with. This is also the case for your VA home loan. Any real estate transaction is a complicated endeavor. On the surface, it seems like it’s just you and your mortgage broker out there on the front lines. But underneath, there is a team of people working behind the scenes making sure everything is prepared exactly right. There are lawyers, insurance agents, couriers, and administration staff working hard to get the keys in your hand on closing day with no snafus or surprises. And they all charge for their services. Lenders combine all their costs into what is commonly known as Closing Costs.
Closing Costs for a VA loan may seem like a lot of money at first. As a recipient of a VA loan, you definitely save money compared to closing costs on a traditional loan. The VA has certain non-allowable fees that you won’t have to pay. Let’s get more specific about what is included in closing costs. Below we break out some of the more common services that make up closing costs for your VA mortgage. Note that the VA Funding Fee is treated differently from regular closing costs, so we’ll save that one for last.
VA Loan Closing Costs List
- Appraisal Fee
- Origination Fee
- Credit Report
- Title Insurance
- Discount Points
- Recording Fees
- Prepaid Taxes & Insurance
- Daily Interest Charges
- HOA Fees
- VA Funding Fee
VA Appraisal Fees
When you apply to finance a home, the first thing a lender will do is get an appraisal of the property. They need to find out about the asset they are investing in and ensure the house is listed for fair market value. Especially since there is a good chance you’ll be financing 100% of the cost. The VA, in turn, wants to make sure that the house is listed for “reasonable value” since they guarantee the loan. Your lender will make an appraisal request with the VA, who assigns a VA appraiser. The appraiser handles determining the fair market value of the home and assessing whether it meets the minimum property guidelines required by the VA for loan approval. Costs for this vary depending on where you live, but the average price is around $525. Click Here for VA appraisal fee schedules for your area.
VA Loan Origination Fee
The Origination Fee is what lenders use to recover their costs in handling the loan. It is a lump sum that contains the administration, notary, underwriting and attorney fees paid out by the lender while processing your mortgage. VA regulations state that the origination fee is not allowed to exceed 1% of the total amount borrowed.
VA Credit Report
Lenders use your FICO score as a measure of your credit risk. There are three major credit bureaus that collect credit information on you throughout your lifetime. The lender pulls your credit report from all three reporting agencies: TransUnion, Experian and Equifax.
Because each bureau is independent, there can be slight differences in your FICO score between them. If all three scores are different, they will take the one in the middle. If two of them are the same, that is the score that is used, even if the third score is higher. Total cost is about $35.00.
Title Examination and Insurance Fees
Title examination and insurance sound the same, but they are two separate things. It is very important to make sure the title history of your new home is clean. The lender will hire a title company to trace the chain of ownership of the house back through history. The title company looks for any illegal transfers of ownership in the past that could affect you in the future. If it turns out that there was an illegal transfer, someone could have rights to your home down the line! They also determine that there are no other liens on the house. This is for your protection. If there is an old lien on the house, you could be liable for it after you take possession.
Once the title company finishes their work, insurance is needed against any errors or oversights that could have happened during the examination. Each party needs separate insurance – the lender and the borrower. You are not always responsible for the cost of both title insurance policies. Sometimes the seller will pay the lenders policy and the buyer will pay for their own policy. It’s important to put the details into your purchase and sale agreement about who is going to pay what with regards to Title Insurance. The costs vary depending on the work involved, but you can expect the total to be about 0.5% of the loan amount.
VA Loan Discount Points
If you decided to pay points, you pay for them at the time of closing. You purchase points to lower the interest rate on your loan. For each point you buy, your rate goes down ¼ of a percent, and each point costs 1% of the loan. So if you are borrowing $150,000, each point will cost $1,500. The determination of whether it makes sense to pay points is up to you. You’ll need to figure out how much the savings will be per month and then divide the cost of the points by that amount. You may decide that if it takes 15 years to break even, you are better off not paying points and keeping your interest rate as is.
Once you complete the closing, the sale needs to be publically recorded. This allows the county to know who pays taxes, which bank holds the mortgage etc. This fee is set by your county registry, but the national average is around $180.
Prepaid Taxes & Insurance
Prepaids are expenses paid by the borrower in advance. The bulk of prepaids make up what’s known as your Escrow. Having an Escrow account is very useful. It allows the inclusion of your property tax and homeowners insurance into your monthly mortgage payment. Your mortgage payment is made up of three parts: principal, interest and Escrow. Each time you make a payment, the interest is paid first according to your amortization schedule. Then the principal balance is reduced. Any leftover money is deposited into an account called an Escrow. The balance in this account builds up so when tax bills or insurance comes due, your mortgage company can pay using that account. Most lenders require a cushion in your Escrow to ensure it doesn’t run out of money. They add the amount of your property taxes and insurance to the closing cost to create that cushion.
You also need to pay the interest that accrues on the loan before your first mortgage payment is due. If you move into your home on the 15th, your first payment won’t be due until the 1st. The lender does not float that 15 days’ worth of interest. It starts as soon as you sign on the dotted line. Therefore, it’s advisable to schedule your closing as close to the end of the month as possible. If your mortgage is due on the 1st of the month, and you can close on the 28th of the previous month, you’ll only be responsible for 2-3 days of interest.
That sounds like a lot of fees, right? You may remember at the beginning of this article we mentioned VA non-allowable fees. There are many costs the VA disallows as part of your benefit. These include attorney fees incurred by the lender, real estate broker fees, and any
additional appraisals beyond the VA appraisal. Note as well that if your lender is using the 1% Origination Fee, nothing included under that umbrella can be charged separately. For example, you shouldn’t have to pay the Origination Fee and an application fee. It’s a good benefit and saves you money upfront.
Daily Interest Charges
Depending on when your first payment is there may be daily interest charges that will be due at closing. Ask your lender about this.
More and more developments are popping up all over the suburban areas across the United States. Many of these properties require homeowner association fees. Depending on your property these HOA fees may be included in the closing.
VA Funding Fee
While the closing costs are charged to you by the lender, the Funding Fee comes directly from the VA. The VA Funding Fee exists to reduce the cost of the program to taxpayers considering that there is no down payment or Private Mortgage Insurance (PMI) associated with VA loan programs. It protects the borrowing rights of future Service Members and Veterans. It’s calculated using a percentage of the total amount of the loan. That percentage is determined by several factors, including whether you choose to make a voluntary down payment if you’re a first time user or your military category.
For example, let’s assume you are a Regular Military Veteran using their benefit for the first time. You chose not to put any money down on the mortgage. Your VA Funding Fee is 2.15%. If you find you can pay a 5% down payment, your fee drops to 1.5%. This will change as your military category changes. The same scenario for a member of the Reserves/National Guard would be 2.4% and 1.75% respectively. The funding fee is considerably lower for an IRRRL (Interest Rate Reduction Refinancing Loan) and higher if this is the second use of your benefit. Here is the VA Funding Fee Table.
Not everyone has to pay the VA Funding Fee. If you receive compensation for a service-connected disability, you are exempt from this fee. If you are a surviving spouse of a Veteran who died in service or due to a disability you are also exempt. What happens if you have a disability claim pending that gets approved after closing? Or you didn’t realize you were eligible for disability benefits, and the disability is traceable to an event that happened prior to the closing? In those cases, you may qualify for a VA Funding Fee refund. Although the VA is ultimately in charge of whether you qualify for a refund, you can start the process with your lender.
Who pays closing costs on a VA loan? Can closing costs be included in the loan? What about the Funding Fee? The short answer is that you as the borrower are responsible for paying closing costs. And, with the exception of the VA Funding Fee, they can’t be rolled into the loan. The Funding Fee can be rolled into the mortgage, and most borrowers do choose this option.
If you can afford to pay the closing costs out of pocket, it’s to your advantage. Doing so saves you having to pay interest on them over the 30-year term of the mortgage. What if you don’t have the money, or don’t want to put out the cash? You still have some options. Your real estate agent and/or lender may be able to help negotiate credits that cover some or all closing costs.
You can also ask the seller to pay for your closing costs. This is known as a concession. If the seller is very motivated, or the house has been on the market for a long time, they may be willing to work with you. The VA allows a seller’s concessions to make up no more than 4% of the loan amount. If you plan to ask for seller concessions, it’s best to let your real estate agent know upfront. They can go over all your options in detail.
Other VA Loan Closing Costs to Consider
An attorney may not be a requirement in your state, but they are very handy to have around for real estate transactions. Lawyers that are well versed in real estate law can easily
negotiate purchase and sale agreements to your benefit. Some states also require that a real estate attorney is present at the closing of the loan. The cost will depend on how many hours they work for you but expect to pay between $400 and $500.
You may need a company to come out and survey the land surrounding your new home. They will map out your property boundaries to settle disputes between neighbouring plots of land. This may or may not be required based on your lender. Survey fees can run around $500+, depending on the size and terrain of the property.
This is a small fee, but important to you and the lender. They will pull records to determine if your new home is located in a flood zone, also known as a Flood Cert. If you are found to be in a flood zone, there are extra insurance requirements needed to protect you and the lender from flood damage. A Flood Certification costs about $20.
The more educated you are about the VA lending process, the easier it is for you to take full advantage of your earned benefit. Knowing what to expect in regards to your closing costs will take away any surprise while shopping for your new home. We here at National VA Loans are dedicated to helping our servicemen and women get the benefits they earned through service to us all. If you would like more information, please call 855-956-4040 to speak to one of our specialists.