Whether you’re buying a home, selling or refinancing one, there are always going to be closing costs as part of the transaction. These comprise the fees and costs associated with completing the refinance or the purchase. Before the keys are turned over to you most of these closing costs must be paid. However the mortgage program through the VA does a fantastic job of putting limits on what veterans are obligated to pay for closing costs.
This savings in cost is one of the benefits made available to service members throughout the generations to help them achieve home ownership.
Whether you’re a service member, or just a regular citizen buying a house, closing costs can be very confusing. To clear up some of the confusion, let’s take a look at what you might be facing.
Permissible VA Closing Costs
There are many different types of closing costs. In a literal sense they represent the costs associated with doing the loan. When the day comes that you’re closing on your house or loan you may also face paid outside closing costs (POC) and prepaid finance charges (PFC). The latter are associated with your loan and these costs can affect the annual percentage rate (APR) of your loan, which determines what you actually pay to borrow the money.
PFC can include:
- Points to buy-down the interest rate, although this isn’t commonly done with VA mortgages
- VA Funding Fee, something the VA charges veterans for, which you might request the seller pay otherwise you can roll it into your loan
- Escrow for property taxes, homeowners insurance and prepaid interest
- Homeowners Association (HOA) dues if they apply
POC will not be factored into your financing, but still must be paid for. These items would be:
- Cost of credit report
- Fee for home inspection, which every buyer should get
- Fee for pest inspection
- Mandatory VA appraisal of home
Closing costs related to a home loan typically include:
- Loan origination, underwriting and the processing fees
- Title report and insurance
- Site survey if necessary
There are typically two different options for lenders in terms of the costs of originating and processing a home loan. They are allowed to charge a 1% flat rate origination fee and other typical charges as long as they’re reasonable. Or they might forego the 1% flat rate and separate out the fees individually, as long as they do not charge you more than the same 1% of the total amount of the loan.
Closing Costs Not Allowed on Homes Purchased Through the VA
Closing Costs on homes purchased through the VA often have costs and fees tacked on that veterans are not allowed to pay under any circumstances. The main goal of the VA is to minimize the closing costs for veterans so they can afford to buy a home. This is one of the most important benefits of a VA loan.
Some of the closing costs not allowed on a VA home mortgage are:
- Broker fees
- Document fees for the lender
- Notary fees
- Recording fee over $17
- Termite inspection report
- Transaction coordinator
It can be challenging when trying to estimate the closing costs for a transaction since there are so many variables. Once you’ve completed the loan application, which will include the street address of the house you have your sights on, your lender has up to 3 business days to get back to you with a Good Faith Estimate (GFE) on the costs. This estimate should provide you with an accurate picture of what your loan involves, including a realistic estimate of closing costs. Having a lender give you a GFE puts you under no obligation whatsoever to that lender or to that loan amount. But it will give you a realistic idea of what the costs will be to purchase that particular home, and this is helpful information when you sit down with your seller to negotiate the selling price.
Paying For Closing Costs
Who end up paying the closing costs is often a matter of negotiation. The buyer and seller hash this out. The VA doesn’t have a cap on how much the seller is allowed to contribute toward their buyer’s closing costs related to the loan, so it’s perfectly appropriate to ask the seller to cover them. Additionally, the seller is allowed to pay up to 4% of the amount of the loan, which is called a concession. This would cover items like liens on the borrower and any PFCs.
However the seller is not under any obligation to pay any of these costs. If you’re looking to buy a home in a hot market it’s very likely that you will run into sellers that are very reluctant to assume these closing costs. But if you are a VA borrower it is very common that the seller pays most of the closing costs, if not all of them.
At the end of the day, it’s going to come down to what your Realtor can negotiate for you. Your lender can also give you suggestions when it comes down to crafting your offer.