How Are VA Loan Closing Costs Different?
As with most aspects of the VA home loan process, closing costs will look different than they do with other mortgage loans. Here’s where VA closing costs deviate from the closing costs associated with conventional home loans.
Non-Allowable Fees
In an effort to make VA loans more affordable, the U.S. Department of Veterans Affairs limits the types of fees that lenders can charge on a VA loan. The fees that a lender can’t charge on a VA loan are known as non-allowable fees. These fees include any prepayment penalties, settlement charges and lender attorney fees.
Those who use a conventional loan to fund their purchase may be required to pay attorney fees from the lender, along with settlement charges. Financing with a VA loan allows you to avoid these costs.
However, some other fees – known as allowable fees – are required. These include the VA funding fee, loan origination fees, recording fees, credit report fees, and the cost of discount points and title insurance.
Limited Origination Fee
No matter the type of loan, a lender will typically charge a mortgage origination fee for underwriting and processing the loan. But, when you use a VA loan, a lender is limited in how much they can charge for an origination fee.
Mortgage origination fees typically range from 0.5% – 1% of the loan amount, but they can be higher. When using a VA loan, borrowers can’t be charged an origination fee exceeding 1% of the loan amount.
VA Funding Fee
The VA funding fee is a unique cost to those who take out a VA loan. This is a one-time fee that you pay to the Department of Veterans Affairs. The funding fee is used to support the continuation of the VA loan program.
The cost of the funding fee depends on whether you’re purchasing a home or refinancing, how many times you’ve used your VA loan benefit, and the size of your down payment. The funding fee represents a percentage of your loan amount, so the larger the down payment you make, the smaller your loan and funding fee will be.
An Example Of A VA Funding Fee
For example, suppose you make a down payment of less than 5% on your first home purchase using the VA loan. With that, you would have to pay a funding fee that’s 2.15% of the loan amount. But, if you made a down payment of 10% or more, your funding fee would only be 1.25%.
When The VA Funding Fee Isn’t Required
In some special cases, you won’t have to pay the VA funding fee at all. This exemption often applies if you’re:
- Receiving or eligible to receive VA compensation for a service-related disability
- The surviving spouse of a veteran who died in service or from a service-related disability
- Eligible for compensation because of a pre-discharge claim
- An active-duty service member who’s a documented recipient of the Purple Heart
If you aren’t sure you qualify for a VA funding fee waiver, talk with your mortgage lender. They can verify this with the VA.
VA Appraisal Fee
With most home purchases, you’ll have to pay an appraisal fee. But, when you choose a VA loan, there’s a specialized VA appraisal fee.
The amount you’ll pay for the VA appraisal fee will vary based on the type of home you’re purchasing and the demand for homes in your area. You can typically expect to pay $525 – $1,550 for the VA appraisal fee portion of your closing costs.
