VA loans have closing costs, much to the dismay of many that believe VA loans don’t allow closing costs. In many cases, someone other than the buyer pays the closing costs, which gives the loan the stigma that veterans don’t pay closing costs.
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In fact, veterans pay almost the same closing costs that anyone else pays on a regular mortgage. Yes, the VA does restrict the costs the buyer can be responsible for, but overall, the fees come out to about the same. The VA does allow the seller and/or lender to help veterans with their closing costs, but otherwise, the veteran must pay them.
Rolling the Costs Into the Loan
The only closing cost veterans can roll into their loan is the VA funding fee. The VA charges this fee every time you take out a VA loan. Typically, veterans pay 2.15% of their loan balance to the VA if they were in the regular military and 2.4% if they were in the Reserves or National Guard. This amount may decrease slightly if you put money down on the home.
If you put between 5% and 9.99% down on your VA loan, the amount decreases to 1.5% of your loan amount. If you put down 10% or more, you’ll pay 1.25% of the loan amount. Disabled veterans that the VA rated disabled won’t pay a funding fee and neither will surviving spouses of veterans that died while on active duty or as a result of their active duty.
Paying the Other Closing Costs
The other closing costs, of which there are many become your responsibility. The closing costs may include:
- Origination fee
- Discount points
- Appraisal fee
- Title fees
- Credit report fees
- Property taxes
- Homeowner’s insurance
- Prepaid interest
- HOA fees
Now these fees are your responsibility, but the seller can pay them too. If you negotiate with the seller at the time that you sign the contract, they may be willing to cover your closing costs if your bid was close to the market value of the home. Sometimes sellers get more than they anticipated for the home and are willing to cover your closing costs for you to make sure that your loan goes through to the closing.
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The seller is able to cover all of your closing costs. They can also contribute up to 4% of the loan amount in seller concessions. These are fees that aren’t related to your loan closing, such as property taxes, homeowner’s insurance, and HOA fees. Seller concessions also include bonuses the seller might leave behind, such as appliances or window treatments. Sellers can also pay off any judgments or liens that may be hindering your approval.
Making Sure the Closing Costs Fit
One of the things you have to be careful about is the value of the home. The VA won’t let you borrow more than 100% of the home’s value. If you bid $150,000 on a home, but need help with $5,000 in closing costs, the seller will ask that you offer $155,000 and then the seller will credit the $5,000 at the closing. But, if the home is only worth $150,000, you won’t be able to get the help with the closing costs.
An Alternative to Rolling Your Costs into the Loan
One other option you have to get help with your closing costs is to ask the lender. That’s right, lenders can pay your closing costs for you. In exchange for them paying your closing costs, the lender will charge you a higher interest rate. Typically, they charge an extra 0.5% to cover your closing costs.
If you are going to stay in the home for a long time, taking the higher interest rate may cost you too much. But if you know this home is only a temporary purchase, paying the higher interest rate for a short time will likely cost you less than the closing costs would have cost you.
While you can’t roll your closing costs into your VA loan, you have two other options to make your VA loan more affordable. Talk to your lender and/or seller about your options to see what you can do about getting your closing costs covered.
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