A Guide to Veteran Affairs Loan Closing Costs
VA Loan Closing Costs
A Comprehensive Guide to VA Loan Closing Costs
Understanding VA Loans and Closing Costs – For veterans, active-duty service members, and surviving spouses, the Veteran Affairs (VA) loan program provides one of the most advantageous ways to secure a mortgage.
With benefits like no down payment, competitive interest rates, and easier qualification standards, VA loans are a powerful tool for homeownership.
However, despite the many advantages, these loans do come with certain costs—specifically closing costs—that borrowers must be prepared to handle.
Closing costs are an unavoidable part of the homebuying process. These fees and expenses can add up, and it’s important to understand what they are, why they are necessary, and how to manage them.
With proper preparation and knowledge, you can minimize surprises and ensure a smoother path to homeownership.
In this comprehensive guide, we’ll dive deep into the different components of VA loan closing costs. We’ll explain each cost in detail, offer strategies for negotiating or reducing expenses, and provide tips on how to manage these costs effectively.
Whether you’re a first-time homebuyer or a seasoned veteran, this guide will equip you with the information you need to handle your VA loan closing costs confidently.
What Are Closing Costs?
Closing costs refer to the various fees and expenses incurred during the process of finalizing a mortgage and transferring property ownership.
These costs are paid during the closing process, which is when the title of the property is officially transferred from the seller to the buyer.
Closing costs are typically a percentage of the home’s purchase price, usually ranging from 2% to 5% of the loan amount, depending on factors like the cost of the home, location, and the specific lender’s fees.
While VA loans offer substantial benefits, such as no down payment and no private mortgage insurance (PMI), buyers are still responsible for closing costs.
These costs can vary significantly depending on the specifics of the loan and the property, so it’s important to budget for them when planning your home purchase.
Key VA Loan Closing Costs
There are several common closing costs associated with VA loans. Below, we break down each of these costs and explain what they entail, why they’re necessary, and how they are calculated.
1. VA Funding Fee
The VA funding fee is one of the most significant closing costs for VA loan borrowers. This fee is paid to the U.S. Department of Veterans Affairs (VA) to help fund the VA loan program and ensure its continued operation.
The fee helps offset the costs of the program, as VA loans are offered with favorable terms that benefit veterans.
How much is the VA funding fee? The amount of the funding fee depends on several factors, including:
- First-time or subsequent use: First-time VA loan users typically pay a lower fee than those who have used the program previously.
- Down payment amount: The size of your down payment also affects the fee. Veterans who make a larger down payment (e.g., 5% or more) will pay a lower funding fee than those who don’t make a down payment.
- Disability status: Veterans who are receiving VA disability compensation or have a service-connected disability are exempt from paying the funding fee altogether.
Examples of funding fees:
- First-time use, no down payment: 2.15% of the loan amount.
- Subsequent use, no down payment: 3.30% of the loan amount.
- First-time use, 5% down payment: 1.50% of the loan amount.
You can either pay the funding fee upfront at closing or roll it into your loan balance. Keep in mind that if you choose to finance the funding fee, it will increase your loan amount and, therefore, the monthly payments.
2. Loan Origination Fee
The loan origination fee is a charge by the lender for processing your loan application. This fee compensates the lender for the work involved in preparing your mortgage, including reviewing your financial documents, ordering the appraisal, and underwriting the loan.
How much is the loan origination fee? While the VA does not set a maximum loan origination fee, most lenders charge up to 1% of the loan amount. Some lenders may charge additional fees for things like document preparation or underwriting, but these should also fall under the umbrella of the origination fee.
It’s important to shop around for lenders and compare origination fees, as they can vary. A lender’s total cost isn’t just determined by the interest rate but also by the associated fees.
3. Appraisal Fee
An appraisal is required for a VA loan to ensure that the property’s market value aligns with the loan amount.
An independent, licensed appraiser evaluates the home’s condition, location, and recent sales of comparable properties to determine its value.
The VA requires a VA appraisal to be completed, not a home inspection, which is a different service that assesses the condition of the home.
How much is the appraisal fee? The appraisal fee varies by location, but it typically ranges between $300 and $600.
The fee can be higher in certain areas due to market conditions or the size of the property. While the VA regulates the appraisal process, it does not control the specific cost, which is set by the appraiser.
4. Title Search and Title Insurance
Title insurance protects the lender and the borrower in case of disputes over the ownership of the property.
Before closing, a title search is conducted to verify the legal owner of the property and check for any existing liens or claims on it. This process ensures that the property is free of legal issues and can be legally transferred to you.
How much is the title search and insurance fee? Title search fees typically range from $200 to $400, while title insurance costs can range from $400 to $900, depending on the property’s value and location. Title insurance is typically a one-time premium that protects the buyer and lender.
5. Property Taxes
Property taxes are an ongoing expense that homeowners must pay annually. At closing, the buyer may need to pay a portion of the property taxes upfront, especially if the taxes are due soon after closing.
In addition, the lender may establish an escrow account where they collect property taxes as part of your monthly mortgage payment. The lender will then use the funds in the escrow account to pay the taxes on your behalf when they are due.
How much are property taxes? Property tax rates vary widely by location and are based on the assessed value of the property. Some states and local governments may require the buyer to prepay a portion of property taxes at closing.
6. Homeowners Insurance
Homeowners insurance is required by the lender to protect the home against risks such as fire, theft, or natural disasters.
The policy ensures that the home is financially protected if damage occurs, and the lender wants to be sure their collateral is safeguarded.
How much is homeowners insurance? The cost of homeowners insurance depends on several factors, including the value of the home, the area’s risk of natural disasters, and the deductible chosen. On average, homeowners insurance costs between $500 and $1,500 per year.
At closing, the lender will often require you to pay the first year’s premium upfront, though you can often arrange to include it in your monthly payments.
7. Attorney Fees
In some states, particularly those with attorney-required closing laws, you may need to hire an attorney to represent you during the closing process.
The attorney’s role is to ensure that the legal paperwork is correctly prepared, and to review the terms of the sale and mortgage documents.
How much are attorney fees? Attorney fees vary depending on the complexity of the transaction and the local market. The fees could range from $500 to $1,500 or more, depending on the state and the attorney’s hourly rate.
8. Recording Fees
Recording fees are charged by the local county or municipal office for recording the sale of the property in the public record. This is a necessary step to officially transfer ownership of the property.
How much are recording fees? Recording fees are generally modest, typically between $50 and $250, depending on the jurisdiction.
9. Survey Fee
A property survey confirms the exact boundaries of the property and ensures that there are no encroachments, such as structures or fences, that extend onto neighboring properties. A survey may be required by the lender to verify the property’s legal description and boundaries.
How much is the survey fee? Survey costs can vary greatly depending on the size and location of the property. Typical survey fees range from $300 to $600, though they can be higher in certain circumstances.
10. Pest Inspection Fee
In some cases, particularly for homes located in areas prone to termite infestations or other pest problems, the lender may require a pest inspection.
This inspection ensures that the home is free of pest-related issues that could cause damage to the property.
How much is the pest inspection fee? A typical pest inspection costs between $75 and $150. In certain cases, the seller may be responsible for paying this fee.
Negotiating Closing Costs
Although many closing costs are non-negotiable, there are some strategies you can use to reduce your expenses or shift some of the costs to the seller or lender.
- Seller Concessions: In a buyer’s market, the seller may agree to cover a portion of your closing costs, especially if the property has been on the market for a long time. This can significantly reduce your out-of-pocket expenses.
- Lender Credits: Some lenders may offer to pay for part of your closing costs in exchange for accepting a slightly higher interest rate on your loan. While this increases your monthly payments, it can reduce your upfront costs.
- Negotiating Fees: Certain fees, such as loan origination fees, may be negotiable with the lender. Be sure to ask if there is room for flexibility on these costs.
Managing VA Loan Closing Costs
- Shop Around for Lenders: Interest rates and closing fees can vary significantly from lender to lender. Take the time to compare offers from multiple lenders and evaluate their total costs, not just the interest rate.
- Plan Your Budget: Closing costs can add up quickly, so it’s important to budget for them in advance. Keep in mind that you’ll need to cover these costs in addition to the purchase price of the home.
- Explore VA Loan Programs: Some VA-related programs, such as the VA Energy Efficient Mortgage (EEM), may offer assistance with certain closing costs or allow for the financing of certain expenses.
- Ask About Assistance Programs: Some states and local governments offer programs to help veterans cover closing costs, especially for first-time homebuyers. Investigate what programs might be available in your area.
- Review the Closing Disclosure: Be sure to review your Closing Disclosure carefully before signing. This document will outline all the closing costs and fees associated with your loan. If you notice any discrepancies or unexpected charges, ask your lender for clarification.
Final Thoughts
VA loans offer tremendous benefits to veterans and service members, but closing costs are still a factor to consider when purchasing a home.
By understanding the various fees associated with VA loans and taking steps to manage these costs, you can ensure a smoother homebuying experience.
Whether you’re a first-time homebuyer or an experienced borrower, preparation is key. By budgeting wisely, shopping around for the best deal, and exploring potential assistance programs, you can reduce the financial burden of closing costs and move confidently toward homeownership.
