The most common questions from a buyer include: How much is my payment? What are my closing costs? What is the rate? How much do I need to bring to closing? For military service men and women, Veterans, and surviving spouses, the questions are basically the same. As far as VA loan closing costs go, there are some differences compared to other loans. However, most costs are just like other mortgage loans. Let us:
- Explain the costs
- Dispel some myths
- Detail the requirements
- Provide closing cost strategies
Does a VA Loan Cover Closing Costs?
Let’s clear up the myths first. There are 3 common misconceptions we hear from buyers and real estate agents. First is that there are no closing costs on a VA loan. Second is that all closing costs are paid by VA. Third, the seller is required to pay the buyer’s closing costs. None of these are true. VA loans are just like any other mortgage loan. For instance, there is an appraisal, closing attorney, title insurance, homeowners insurance, escrows, and other costs. Although, there are some specific VA loan closing costs and processes which we explain in this article.
Keep in mind, the buyer’s closing costs are the buyer’s closing costs and the seller is not required to pay them. Although, the seller is allowed to pay them and we discuss the requirements and strategies in detail in a moment.
VA Loan Closing Costs – VA Funding Fee
Like other government loans (FHA and USDA), VA loans have a funding fee, also known as a guarantee fee. The funding fee serves a few specific purposes. The Veterans Administration benefits by the fee covering administrative costs and losses resulting from foreclosures. Thus, U.S. taxpayer takes less of a hit. Additionally, a VA funding fee is a form of mortgage insurance. Rather than charging a monthly mortgage insurance premium for no money down, VA has the one-time funding fee.
Where FHA and USDA each have a set fee, the VA funding fee is dependent on some variables.
- First or subsequent use
- Type of military service
- Down payment level
- VA disability
Depending on the combination of above items, the VA funding fee percentage may be 0%, 1.25%, 1.5%, 2.15%, 2.4% or 3.3%. Fortunately for VA borrowers, this fee is financed on top of the base loan. A borrower or seller may pay this fee instead of adding it to their loan. If you are looking for a more in depth explanation, check our article “VA funding fee – what is it, how much is it, how do I pay it, and why is it charged?“.
VA Termite Inspection Requirements
When buying a home or refinancing in an area where the probability of termite infestation is very heavy or moderate to heavy according to the Termite Infestation Probability Map, VA loans require a termite inspection of the home. A termite inspection is not required on a VA interest rate reduction refinance loan. Furthermore, lenders will not allow a VA buyer to pay for a VA pest inspection on a purchase.
These wood destroying pests create potentially huge structural issues to homes and VA recognizes this. So, what are these pest inspectors looking for? Basically, inspectors are looking for signs of active/previous infestation, signs of prior treatment, areas conducive to termites, moisture issues, and damage from moisture or termites. Want all the details about VA termite inspections and how to read the report? Check out our article, “VA termite inspection explained – Do not let these little bugs kill your VA purchase“.
VA termite inspection cost: Typically ranges from $50 – $100
VA Well and Septic Inspection
Many buyers choose to live in suburban and rural areas. Sometimes properties in these areas often have a well and septic tank. In these cases, the Veteran’s Administration has certain requirements. When a property’s drinking water comes from a private well, VA loans requires the water source passes a well inspection. The water test must at least test for E-Coli and Coliform. For community wells, VA requires documentation from the county or company servicing the well. The documentation must provide how the well is maintained, how often tested, and the results from the last testing.
Although a septic inspection is typically not required unless the VA appraiser states a reason for it, it is a good idea for buyers to order one. If a septic inspection declares any issues, they must be remedied prior to closing.
When required, well and septic inspections are good for 90 days.
New construction requires documentation to show that the well water and septic tank pass inspection. Typically, requesting the reports from the local governing authority is best since they must inspect anyway.
Well inspection cost: Typically ranges from $50 – $250
Septic inspection cost: Typically ranges from $300 – $500
Other Standard VA Loan Closing Costs
Like any mortgage loan, there are closing costs. Although, many of the costs depend on the property. Below is a potential list of VA loan closing costs. Items such as a well, septic, foundation certification, survey, and elevation certificate depend on the property’s characteristics. Furthermore, the actual fee charged depends on the area and the provider chosen.
Inspection Related Third Party Costs
Keep in mind, these are third party fees and not paid to the lender.
Processing Related Fees
During the processing of a VA home loan, there are certain verifications to complete. Pulling credit, verifying income, determining flood zone, processing, and underwriting are key steps in the VA loan process. Verification is usually provided by third party companies and the actual fees are charged to the borrower. The amount depends on the the lender’s provider charges.
- Credit Report $35 – $50
- Commitment/Application $500 – $1000
- Tax Service Fee $75 – $95
- Tax Transcripts $25 – $55
- Flood Certification $12 – $18
Depending on the state and the lender, typically there is a fee charged. It may be called a commitment, processing, or application fee. This fee varies with different lenders. OVM Financial charges a lower fees for VA borrowers.
Settlement and Title Related Fees
The following are typical VA loan closing costs related to closing attorney, settlement or title company, insuring title, and any state or local taxes or fees. This section involves making sure that when the title is clear of defects, the closing is executed correctly, documents are explained, and all monies balance. For the most part, these amounts depend on the choice of closing provider, loan amount, and city/state.
- Attorney Fees $450 – $850
- Title Search $200 – $450
- Courier Fee $30 – $50
- Recording Fees $50 – $150
- State & County Tax Stamps – Depends on location
- Transfer Tax – Depends on location
- Lenders Title Insurance – Based on state & loan amount
- Owner’s Title Insurance – Based on state & price vs. loan amount
First Year of Insurances Due by Closing
At a purchase closing, expect to pay the first year’s annual premium for any insurances required or chosen. Depending on the property and area requirements, there could be one or more insurance types. Therefore, homeowners insurance, flood insurance, or wind & hail insurance policies could be involved. By paying the annual premium, the first year of insurances is covered. Then, the escrow account takes over for future years.
What Is An Escrow Account?
Like the annual insurance premium paid at closing, escrows are not really closing costs. They are considered pre-paids because these figures are the borrower’s funds deposited into an account for future use. That future use is paying the property taxes and insurance when due. Occasionally, VA buyers ask the question, “Can I include my property taxes and insurance in my monthly mortgage payment?”. Actually, VA lenders require escrows for taxes and insurance. That means that these amounts are added to the principal and interest monthly payment. Many wonder how an escrow account actually works.
Escrow Account Set Up
First of all, think of an escrow account as a savings account, except the funds do not accrue interest. A calculated amount is deposited at the opening of the escrow account (at closing). Remember the monthly taxes and insurances are included in the VA monthly payment. Each month 1/12 of the annual insurances and property taxes are taken from the payment and deposited into the escrow account.
Escrow Account Pay Outs
The account balance increases until each item is due. For instance, in one year from closing, the next year’s insurance premium is due. Therefore, the premium is withdrawn and sent to the insurance provider. Since the new premium is paid, the insurance is in place for the following year. Withdrawals for property taxes generally pay the current year’s property tax bill.
Escrow Account Fluctuations
The escrow account balance continues to increase and decrease as deposits are made and payments are made towards insurance and tax payments. Also, keep in mind that each year taxes and insurances may increase or decrease. Thus, the mortgage company must adjust the monthly mortgage payment to account for the new amounts. By adjusting the payments along with a potential refund or request for deposit from the borrower, the escrow account should stay sufficiently funded to pay these bills.
How Much Will My Escrows Cost?
This depends on the amount of taxes and insurance. Generally, a buyer should figure 2 – 3 months of insurance premium and six months of property taxes for an approximate amount. This will not be an exact figure, but it will provide a rough estimate. Your mortgage loan officer will be able to provide a better estimate for you.
Who Pays Closing Costs?
We have discussed required, potential, and optional VA loan closing costs. VA loans typically finance 100% of the home’s purchase price, but what if the buyer wants to bring no cash to closing? Whether the buyer does not have cash for closing or just chooses not to bring cash to close, there are options. Even if a buyer could bring funds to closing, there are reasons or strategies to finance them. This is a whole other discussion and should be discussed with a loan officer.
Now, let’s talk solutions!
Seller Paid VA Loan Closing Costs
As mentioned earlier, this is a topic of confusion. Sometimes it is thinking there are no closing costs, the seller must pay them, or just confusion over the amount the seller may pay. Let’s set the record straight, and this is the best way I can think of saying it. There are VA loan closing costs charged to the buyer, and someone has to pay these costs. Even though these are costs charged to the buyer, it is “customary” for the seller to pay a portion or all of the VA buyer’s costs. Notice this says “customary” and not “required.” Often the seller contributes a portion of the sales price towards paying the VA buyer’s costs.
VA Loan Maximum Seller Paid Closing Costs
Although the seller may pay buyer VA loan closing costs, there are limitations. Above we mentioned, there are closing costs and pre-paids (insurance premiums, escrow setup, and interim interest). The Veterans Administration allows for the seller to pay all reasonable and customary closing costs for the buyer. These include all items above categorized as closing costs as long as they are normal for the market. Yet, closing costs are not all of the funds due at closing. There are pre-paids as well. But, do not worry! There is a solution to cover these and more!
VA Loan Sales Concessions
Sales concessions are different than seller paid closing costs and there are limitations. The seller can cover closing costs and then has 4% of the price towards pre-paids and other areas. Besides the pre-paids, what else is allowed? VA sales concessions are the cool part of a VA loan that can create strategies to help a Veteran get into a home. VA sales concessions can cover:
- Buyout a buyer’s current lease
- Payoff buyer debt
- Cover down payment
- Pre-pay HOA Dues
- Cover improvements not required by appraisal
We have been able to help many Veterans use this feature to purchase their dream home.
VA Loan Lender Credits Pay Buyer Closing Costs
Finally, there is another option to cover a portion of a the buyer’s VA loan closing costs. That is a lender credit issued towards paying a certain amount of closing costs. This amount is typically based on the interest rate. For instance, there may be a lower rate offered charging points, another rate charging zero points, and finally another charging zero points but also providing a credit towards buyer costs. Each may be great options, but the right option varies on each borrower’s scenario. So, don’t think a higher rate is the worst option. Believe it or not, sometimes it is the best option.
Take the Next Step!
Hopefully, this provided helpful information on VA loan closing costs and requirements. Even though there are a lot of items mentioned, many are optional. Others depend on the property type and condition as well as the location. After learning a little about the costs, the best and next step is to speak with a knowledgeable loan officer. Tell us your scenario and ask your questions now!