Figuring out how much money you need at a loan closing can get overwhelming. Not only do you need a down payment, but you also have to pay closing costs. They can significantly the amount of money you need at the closing.
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VA loan borrowers, luck out in two ways, though. One, they don’t need a down payment. The loan program provides
100% financing. That right there is an incredible savings. Second, though, they allow sellers to pay all of the veteran’s closing costs. In reality, a borrower can come to the closing table with no money and close on a VA loan.
Of course, it’s up to the seller’s discretion whether they want to pay the costs for them. Some sellers pay all of the costs; others pay a fraction or none of them.
What are Allowed VA Closing Costs?
In order to understand the benefit of the seller paying the closing costs, it helps to understand what veterans pay.
The VA restricts the type and amount of costs lenders and third parties can charge veterans on a VA loan. The most common allowed costs are as follows:
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- Origination fee – If a lender charges this fee, it takes the place of any other lender-charged closing costs. A lender may only charge up to 1% of the loan amount for this fee. For example, you could only pay $2,000 on a $200,000 loan.
- Discount points – If you want a lower interest rate, you may pay a discount point. This is also a percentage of your loan amount. It’s different from the origination fee, though. One point usually lowers an interest rate 0.25%.
- Processing fee – The lender may charge this only if they don’t charge an origination fee. It covers the cost of processing the paperwork on your loan.
- Underwriting fee – Again, lenders may only charge this if they don’t charge an origination fee. This covers the cost of verifying your documents and determining your eligibility for the loan.
- Document preparation fee – This is also a part of the 1% maximum origination fee. It covers the cost of preparing the documents for closing.
- Appraisal – The VA sets the fee for the appraisal. It usually costs around $500 and must be paid up front. This is not a lender fee and does not count towards the 1% maximum.
- Credit report fee – Some lenders charge a separate fee for the credit report. The VA does not allow more than a $50 charge for this fee.
- Title fees – This covers the cost of the title search and the title insurance. The money goes directly to the title company, not the lender. The fees vary based on your location and the size of the home.
Flood certification – This alerts the lender if the home is located in a flood zone and requires flood insurance. You’ll need to secure flood insurance before the closing if the home is in a flood zone.
- Attorney fee – The VA doesn’t require you to have an attorney, but it’s always beneficial. They help you with the contract at the start of the bidding process as well as at the closing. They protect your interests and make sure you understand everything about your mortgage and home purchase.
What Closing Costs are Not Allowed?
The VA also has a list of closing costs that they do not allow.
- Closing fee – The title company often charges a fee to close the loan, but the VA does not allow it. This includes any fees for a Closing Protection Letter or document preparation costs.
- Courier fees – The title company often uses a service to get documents where they need to be quickly. The VA does not allow borrowers to pay the fee, though.
- Fees to lock in the interest rate – Veterans should not have to pay to lock their interest rate.
- Tax service fee – The county charges this fee, but the borrower cannot pay it.
- Mortgage broker fee – If you use a mortgage broker, they cannot charge you for finding a lender for your loan.
The closing costs that the VA does not allow must be covered by the lender if they are charged. The lender can pay the costs out of the proceeds they make on your loan.
The seller can pay any of the above fees for you, though. This helps decrease the amount of money you must bring to the closing. Keep in mind, though, this is different from seller concessions. A seller can contribute an additional 4% of the loan amount to help you with certain costs. These include setting up an escrow account, additional discount points, and the funding fee.
Keep this in mind as you negotiate with sellers when you have
VA loan eligibility. It can save you a significant amount of money when you purchase a home.
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