Pulling Back the Curtain on VA Home Loan Closing Costs

No matter which side of the homebuying equation you're on, nobody likes closing costs. These are costs and fees associated with procuring and finalizing a home purchase or refinance, and most of them must be paid before you get the keys to your dream home. But the VA mortgage program does an exceptional job of limiting what veterans can pay in closing costs.

That cost consciousness is a benefit designed to help make homeownership accessible to generations of service members.

But on the whole, closing costs are often confusing for homebuyers -- first timers or otherwise. Let's take a closer look at what to expect.

Allowable VA Closing Costs

Closing costs can come in many different forms. In a strict sense, closing costs represent the actual cost of doing a loan. There are also prepaid finance charges (PFC) and paid outside closing (POC) costs to contend with when closing day arrives. PFC costs are directly associated with the loan and can ultimately affect your overall annual percentage rate (APR), which reflects the total cost of borrowing.

PFC items can include things such as:

• Escrow for prepaid interest, property taxes and homeowners insurance
• Points used to buy down an interest rate, which isn't all that common with VA home loans
• The VA Funding Fee, which the VA charges and veterans can roll into the loan or ask the seller to pay
• Homeowners association dues if applicable

Items marked "POC" aren't factored into your overall financing, but they still have to be covered. These can be things like:

• Credit reports
• Pest inspection fee
• The VA appraisal, which is mandatory
• Home inspection if the buyer chooses to get one (which you always should)

Last, there are the closing costs associated with the loan product itself. Those typically include fees for:

• Origination, underwriting and processing
• Title exam and insurance
• Survey (if needed)

Lenders have a couple of options when it comes to the costs related to originating and processing your loan. They can charge a flat 1 percent origination fee (along with the other normal charges up to a reasonable amount) or skip the flat rate and charge fees on an individual basis, as long as the total dollar amount doesn't exceed that same 1 percent of the loan amount.

Non-Allowable VA Fees

There are plenty of other potential costs and fees the VA does not allow homebuyers to pay. Minimizing closing costs remains one of the biggest VA loan benefits. Some of those non-allowable closing costs on a VA purchase include:

• Attorney fees charged by the lender,
• Mortgage brokerage fees or broker commissions,
• Real estate broker or agent commissions or fees,
• Fees for appraisals requested by the lender or seller for a Reconsideration of Value,
• Lender appraisals

VA buyers are not allowed to pay these fees in a purchase transaction. That doesn't mean the seller is required to pick up the tab. The lender or real estate agent can cover these fees as well.

There is no exact way to calculate how much the closing cost on a VA loan is before purchase, since it varies based on a number of factors. Once you fill out a full loan application, which will likely include the address of the home you're hoping to purchase, a lender has three business days to send you what's called a Loan Estimate. This document will give you a basic snapshot of the loan, including estimates for your closing costs. It doesn't obligate you to that particular loan amount or lender. But it generally gives you a good idea of the costs associated with your home purchase, and that's helpful when it's time to negotiate with the seller.

Who Pays Closing Costs on a VA Loan?

Who actually pays your closing costs often depends on what you're able to negotiate with the person selling you the home. Here are some common scenarios:

• The seller can pay your non-allowable closing costs, which is considered a seller concession, and is limited to 4 percent of the sales price of the home. Learn more about VA seller concessions.
• The buyer's real estate agent can pay some closing costs in the form of a credit at the closing table.
• The lender can pay or offset part or all of the buyer's closing costs with a lender credit, often by adjusting the borrower's interest rate. This is similar to buying discount points.
• Lastly, you the buyer can pay.

The VA has no cap on how much a home seller can contribute toward a buyer's loan-related closing costs, so you can certainly ask the homeowner to cover all of it. In addition, a seller can pay up to 4 percent of the loan amount, but sellers are under no obligation to pay anything. Homebuyers in housing markets that are starting to heat up may find some sellers reluctant to take on all or even some of those closing costs. But for VA borrowers it's still pretty common to have the seller pay most if not all.

In summary, the VA allows closing costs to be paid by the seller, the buyer, or shared between both parties. In the end, it's really about what you and your Realtor can negotiate. You should also turn to your loan specialist for suggestions and help when the time comes to craft an offer.