Can Closing Costs Be Included in a VA Loan?

If you are a U.S. military service member, qualifying veteran, or qualifying surviving spouse, you can qualify for a VA loan to purchase a home.

A VA loan is a type of mortgage funded by private mortgage lenders but guaranteed by the U.S. Department of Veterans Affairs (VA). It facilitates buying, building, or improving a home without the stringent requirements of conventional financing options.

VA loans are attractive because they do not require a down payment and don’t charge private mortgage insurance (PMI) despite the owner having less than 20% equity. They generally have more lenient credit requirements, making it easier for eligible borrowers to qualify.

Can closing costs be included in a VA loan, or does the borrower need to come up with these funds? Let’s find out.

What are VA Loan Closing Costs?

“Closing costs” is an all-encompassing term applied to many fees and expenses incurred when buying a home, some directly related to the loan origination and others not. 

The VA limits the fees a veteran can pay when purchasing a home with a VA loan. 

VA Funding Fee

A VA funding fee is unique to VA loans. The fee can be between 0.5% to 3.6% of the total loan amount. The amount of the VA funding fee depends on: 

• Type of Loan: The VA funding fee varies based on the specific type of VA loan, such as purchase, refinance, or other loan types.
• Borrower’s Military Category: The fee differs among various categories of service. Historically, regular service members didn’t have to pay as high of fees as Reservists and National Guard members. However, in 2019, with the passing of the Blue Water Navy Vietnam Veterans Act, all military branch fees became equal. 
• First-time or Subsequent Use: The fee amount is affected by whether the borrower uses the VA loan benefit for the first time or has used it previously.
• Size of Down Payment: Larger down payments can reduce the VA funding fee. The fee decreases as the down payment increases.

Not all VA borrowers have to pay the VA funding fee. Specific individuals, such as veterans affairs receiving VA disability compensation, are exempt from the fee if they file a VA funding fee waiver. What is unique about the VA funding fee is that, unlike other closing costs, it can be financed along with the home purchase.

For example, if it is a borrower’s first time getting a VA loan and they have no down payment, their fee in 2024 would be 2.15%, meaning that the borrower could finance up to 102.15% of the home’s value. 

Loan Origination Fee

Loan origination fees are fees charged by mortgage lenders. The fee compensates the lender and their loan officer for their work preparing the loan documents, performing credit checks, and underwriting.

When establishing a VA loan, the VA limits lenders to a fee of no more than 1% of the loan amount. 

Appraisal Fee

All loans incur appraisal fees. An appraisal fee is charged to cover the costs of a professional appraiser who ensures that the property meets the VA’s minimum property requirements for safety and value. 

What differs from typical appraisals is that the VA requires a property’s condition to meet a certain standard. While the appraisal evaluated the property’s condition, it is not a home inspection.

The appraiser just looks to ensure the property meets the VA’s requirements: safe, structurally sound, and free of health hazards. Then, they ensure that the property’s value aligns with comparable sales. 

Appraisal fees vary by location but typically fall between $400 and $700.

Title Insurance

Title insurance protects a lender and buyer against financial losses if defects appear on a title that weren’t uncovered during a title search. A fee is charged to get this insurance. The cost of title insurance itself does not change specifically because the mortgage is a VA loan.

Title insurance rates are generally based on the loan amount or the sale price of the property, and they can vary by state, the insurance company, and the specifics of the property and transaction.

Credit Report Fee

Lenders will pull a credit report to verify the borrower’s credit status and history. This fee covers obtaining credit reports from the three major credit agencies. To clarify, the cost of credit report fees does not change specifically for VA loans compared to other types of loans.

These fees are standard across all loan types and are determined by the credit reporting agencies and the lenders’ policies.

State and Local Taxes

Some states and municipalities require tax payments (transfer or state taxes) during the property transaction process.

These taxes must be paid at closing and can vary significantly based on the property’s location. The tax amount does not change when a borrower uses a VA loan. 

Recording Fees

Recording fees are paid to a local government entity to record the deed and mortgage, legally documenting the transfer of ownership. This fee is relatively small but varies depending on local rates. The cost of recording fees does not change specifically for VA loans.

These fees are standard across all types of property transactions, irrespective of the financing method, whether a VA loan, a conventional loan, or any other type.

For VA loans, as with any other type of loan, the borrower is generally responsible for paying the recording fees.

Survey Fee

In some cases, a survey of the property is required to establish property lines and confirm the boundaries of the purchased property. This fee is not always required but can be necessary depending on the specifics of the property and lender requirements.

For VA loans, the borrower can pay the survey fee if a survey is necessary. In some real estate transactions, especially in more rural or undeveloped areas, a new survey may be required if recent and accurate documentation is not available.

Homeowners Insurance

Lenders require the first year’s homeowners insurance to be paid upfront at closing. This insurance covers potential damage to the property, safeguarding both the homeowner and the lender’s investment.

The cost of homeowners insurance does not change specifically for VA loans. Like other types of loans, the insurance company sets the premium. It depends on factors such as the value of the home, its location, the coverage amount, and the deductible chosen by the homeowner.

Prepaid Interest 

This cost covers the interest that accrues from the date the loan is closed until the first monthly payment is due. It is calculated based on the loan amount and the interest rate. This cost doesn’t change because the loan is a VA loan; it is standard across all types of loans.

For VA loans, as with any mortgage, the borrower is responsible for paying the prepaid interest at closing.

Discount Points or Mortgage Points

Buyers can pay discount points to lower their mortgage interest rate. Each point purchased costs 1% of the loan amount and typically reduces the interest rate by 0.25%, though this can vary by lender. The decision to buy discount points should be considered carefully.

It is more beneficial for borrowers who plan to stay in their homes for a longer period, as the upfront cost can be offset by the savings gained from lower monthly payments over time.

VA Loan Closing Costs vs. Conventional Mortgages

Buying a home is expensive beyond the purchase price. Many buyers end up with sticker shock once they know how much closing costs can add up. Fortunately, who pays for closing costs is negotiable when you are putting together a purchase contract. 

Closing costs on a VA loan and a conventional mortgage are usually very similar, but there are some key differences. 

Conventional Mortgage Closing Costs

The amount of a buyer’s closing costs depends on their state and the property they are purchasing. For example, Delaware has the highest closing cost rate, with buyers paying an average of 5.4% of the purchase price in closing costs. Meanwhile, states like Wyoming and Colorado have much lower closing costs, averaging just 0.7% of the purchase price. 

The following is an extensive list of potential closing costs a buyer would pay when purchasing a home with a conventional loan: 

• Loan Origination Fees: Typically about 0.5% to 1% of the loan amount.
• Credit Report Fee: Charged to obtain your credit reports.
• Appraisal Fee: Usually required, costing between $300 and $600.
• Title Insurance and Search Fees: These are necessary to protect against title issues.
• Escrow Deposit: This may include several months of property taxes and mortgage insurance.
• Survey Fee: Depending on local laws and lender requirements.
• Attorney Fees: Required in some states.
• Closing/Escrow Fee: Paid to the party overseeing the closing.
• Home Inspection Fees: Optional but recommended.
• Private Mortgage Insurance (PMI): Required if the down payment is less than 20%.
• Prepaid Interest: Covers the interest between closing and the first monthly payment.
• Real Estate Taxes: The first installment may be due at closing.
• Recording Fees: Fees for registering the new deed.
• Underwriting Fees: Paid to the lender to process the loan application.
• Discount Points: Optional to reduce the interest rate.
• Transfer Taxes: State or local taxes on the transfer of property.

The Differences Between Conventional And VA Loan Closing Costs

For the most part, VA loans and conventional mortgages have similar fees. The biggest difference is the VA funding fee charged to the buyer. Additionally, VA loans do not require PMI, even on loans with a down payment of less than 20%. 

However, what most don’t know about VA loans is that the VA restricts what fees a VA buyer is allowed to pay and which must be paid by the seller. These restrictions can reduce the buyer’s closing costs on a VA loan, not because they don’t get charged, but because the seller pays them. For this reason, some sellers may be hesitant to accept an offer with a VA loan.

If you qualify for both a conventional and VA loan, you should do a detailed cost analysis and benefits vs. risk analysis of each loan option. In a buyer’s market with low competition, most sellers will be happy to work with a VA loan, but in a hot seller’s market, it can be hard to get an offer accepted. Using a VA loan requires negotiating who pays closing costs to fit within the Department of Veterans Affairs guidelines. 

Financing Closing Costs on a VA Loan

Closing costs add up quickly. One of the benefits of a VA is that while there’s an additional charge for the VA funding fee, that fee can be financed. The total amount for the VA funding fee can be rolled into the buyer’s loan amount, meaning that the buyer could actually get funding for more than the entire value of the property. This makes the VA funding fee less burdensome to buyers. 

While buyers can finance their VA funding fee, they cannot finance all VA loan closing costs. Other closing costs cannot be rolled into the loan amount directly and must be paid by the buyer or seller. 

Strategies to mitigate or finance these costs include: 

• Seller Concessions
  The seller can pay some closing costs, including the non-allowable fees, prepaid interest and taxes, and financing costs. This strategy doesn’t eliminate the expense, but it does make the buyer not responsible. 
• Lender Credits
  Some lenders will offer a credit that can be used toward closing costs in exchange for the borrower paying a higher interest rate. This effectively finances the closing costs by spreading them out over the life of the loan through higher monthly payments. 

While most closing costs cannot be included in a VA home loan, if a homeowner is refinancing with a VA loan, they may be able to roll some or all of their closing costs into the new loan amount as long as they have enough equity. 

Who Pays Closing Costs on a VA Loan? 

The VA has specific rules about who pays what, allowing for flexibility and protection for the veteran buyer. On a conventional loan, who pays closing costs is almost always negotiable.

However, on a VA loan, the Department of Veterans Affairs has restrictions on what closing costs a borrower can pay. In these transactions, seller concessions are often necessary. 

Non-Allowable Fees for VA Loan Closing Costs

The VA doesn’t allow VA borrowers to be charged certain fees and closing costs. Non-allowable VA fees include: 

• Real estate agent commissions. 
• Underwriting fees that lenders sometimes charge. 
• Processing and document preparation fees that are sometimes charged by leaders to cover paperwork. 
• Escrow fees charged by the title company or attorney conducting the closing. 
• Notary fees. 
• Pest inspection fees; in many states, these must be paid by the seller. 

How Do Seller Concessions Work on VA Loan Closing Costs

Seller concessions involve the seller agreeing to pay some or all of the buyer’s closing costs. However, the VA also has limitations on how much the seller is allowed to contribute toward closing costs. The VA allows sellers to contribute up to 4% of the loan amount towards the buyer’s closing costs (in addition to any other typically seller-paid fees).

Unlike buyers, sellers are not limited to the fees they are allowed to pay. A seller is even allowed to pay concessions in the form of paying down dents on behalf of the buyer, which can help them qualify for the VA loan. 

The negotiation of seller concessions typically depends on several factors, including the current real estate market conditions, the property’s sale price in relation to its market value, and the individual needs of the buyer and seller.

In a buyer’s market, where sellers are keen to close deals quickly, buyers may have more leverage to request concessions. Conversely, there may be less wiggle room for such negotiations in a seller’s market.

Buying a House with a VA Loan Requires the Right Team

If you want to buy a home using a VA loan, you need to work with the right real estate team who understands your financing needs. Your agent needs to know the limitations and benefits of a VA loan, and you need to find a VA-approved mortgage lender. 

Start building your real estate team with FastExpert. FastExpert allows you to compare real estate agents and mortgage brokers, review their experience, read reviews, and connect with the right agent to navigate your purchase. 

Do VA Loans Require an Origination Fee? 

Lenders are not required to charge an origination fee; however, lenders are allowed to charge this fee. On a VA loan, origination fees are capped at 1%. The origination fee compensates the lender for the costs of setting up the loan. 

Can I Purchase Discount Points for a VA Mortgage?

Yes, you can purchase discount points for a VA mortgage. Discount points are essentially prepaid interest on the mortgage. Each point you buy usually lowers the interest rate on your mortgage, which can result in lower monthly mortgage payments.