The VA helps veterans secure 100% financing for their home purchase. Just because you don’t need a down payment doesn’t mean you won’t need any money at the closing though. You’ll likely still need to pay the closing costs unless you work it out for someone else to pay them. The VA does allow sellers to pay all of a borrower’s costs on a VA loan as long as it doesn’t exceed 4% of the loan amount. The lender can also pay the fees by giving you a slightly
higher interest rate.
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What if you want to pay them yourself, though? What are the rules governing these fees?
The Closing Costs Borrowers Can Pay
The VA does keep closing costs to a minimum for borrowers, but they still add up. In general, you’ll pay between 2% and 5% of the loan amount in fees. So what does the VA allow you to pay? Below are the
itemized fees the VA allows:
- Credit report fee – Generally you’ll pay whatever the credit bureau charges the lender or a $50 flat fee, whichever the lender decides
- Flood zone fee – The lender can charge you the full cost of the flood zone determination as long as it’s done by a 3rd party that is not the appraiser or lender
- Survey – The lender may charge you the full cost of the survey from the county
- Title fees – You’ll pay for the title examination and the title insurance on the loan
- Recording fees – You can pay the fees the county charges to record the mortgage
- MERS fee – The cost for the lender to register your loan with MERS, which is a central system that keeps track of mortgage ownership
- VA funding fee – Most veterans pay a funding fee every time they take out a VA loan
- Prepaid interest – Any interest that you owe from the closing date to the end of the month can be paid
- Hazard insurance – You’ll likely need to pay for a full 12 months of hazard insurance before you can close on the loan
- Real estate taxes – Any taxes you are responsible for as of the date you own the home can be paid
The VA can also charge borrowers a flat 1% fee. This fee covers any closing costs the lender cannot itemize. This may include the following:
- Most lender’s fees including application, processing, underwriting, settlement, and document preparation fees
- Closing fees
- Rate lock fees
- Delivery fees
- Escrow charges
- Notary fees
- Broker fees
- Tax service fees
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Paying Discount Points
One last point to note is the allowed discount points. If you want to buy your interest rate down, the lender may be able to offer you a lower rate for a fee. That fee is usually a percentage of your loan amount. One point or 1% usually lowers the rate 0.25%. It’s important to determine if it’s worth paying this point.
It’s best if you figure out your
break-even point. First, determine how much the point will cost you. Let’s say you have a $150,000 loan. It would cost you $1,500 to lower the rate 0.25%. If you lowered the rate from say 4.5% to 4.25%, you would save $22 per month. It would take 68 months of savings to make up that $1,500. Do you think you’ll be in the home that long? If not, paying the point might not make sense.
Paying No Closing Costs
As we discussed above, it may be possible to pay no closing costs on your loan too. If you have a willing lender, they may charge you 0.5% higher rate in exchange for no closing fees. Again, you have to decide if it’s worth the tradeoff. In this case, it’s the opposite. You won’t have any monthly savings; instead, your payment will be slightly higher.
Let’s say you can get a $150,000 loan with no closing fees with a 4.5% rate rather than a 4% rate. You would pay an extra $44 per month for this benefit. Now that doesn’t sound like a lot, but if you keep the same loan for 30 years, it would amount to $15,840. That’s a lot more than the closing costs would probably have cost. Now, if you know you’ll move in the next five years or so, it could pay off. You’d pay an extra $2,640 in interest, but not pay anything up front.
Paying closing costs doesn’t have to be a deal breaker on your VA loan. There are ways to negotiate lower costs, shop around, and/or get a no closing cost loan. Whichever way you look at it, the VA makes it easy to afford a loan.
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