Like all mortgages, a VA loans come with closing costs. However, VA borrowers may be able to reduce their have several options to reduce and rework these fees.
How does no money down for a home loan sound?
Among the biggest perks of having a VA loan is the ability to buy a home with a 0% down payment.*
But even with no down payment, there are loan settlement, or closing costs, you’ll owe before you get the keys to your new place.
Fortunately, you have several options for reducing how much you’ll need for your VA loan closing costs. That means you may be able to buy a home even if you don’t have a lot of cash upfront.
Closing, or settlement, costs are expenses related to the application and loan process. These can include the lender’s origination fee, appraisal and inspection fees, title search and insurance fees, and other costs.
Unsurprisingly, those fees add up. Closing costs are typically 2-5% of your VA loan amount. A number of factors determine your specific closing costs, including the home price, your down payment, the home’s zip code, and others.
In addition to standard closing costs, VA loans also include a VA funding fee.
And all of these have to be dealt with before you can claim your keys and start loading up the moving van.
The good news? The U.S. Department of Veterans Affairs (VA), which insures VA home loans, allows sellers to cover up to 4% of the home price in closing costs. You can also use closing cost assistance programs to reduce your out-of-pocket expenses, and you may roll the funding fee into the loan as well.
Between these options, you could end up needing little to no cash upfront.
VA guidelines actually require sellers to pay for some closing costs — these are known as seller concessions. They include:
However, you may be able to negotiate on other other costs as well, such as the origination fee and the VA appraisal fee.
The seller cannot pay for the VA funding fee. But most VA buyers wrap it into the loan amount. It is rarely paid in cash upfront.
The VA funding fee helps offset the VA loan program’s administrative costs and enables the agency to back these loans for qualifying military homebuyers.
Unlike FHA loans and USDA loans — the other government-backed mortgage programs — VA loans do not have a monthly mortgage insurance requirement.
How much the funding fee is on your loan depends on whether you’ve made a home purchase with a VA mortgage in the past, as well as the home price and whether you make a down payment.
VA borrowers who are using a VA loan for the first time and have full entitlement available do not need a down payment. However, the lower your down payment amount, the higher your funding fee will be.
| Down payment | Funding fee |
|---|---|
| 0% | 2.30% |
| 5% but less than 10% | 1.65% |
| 10% or more | 1.40% |
Putting down even a relatively low amount, such as 5%, can save you money, especially if you decide to roll the funding fee into the loan.
| Home price | Funding fee with 0% down payment | Funding fee with 5% down payment |
|---|---|---|
| $200,000 | $4,600 | $3,135 |
| $250,000 | $5,750 | $3,918 |
| $300,000 | $6,900 | $4,702 |
| Pro Tip: If you’re a veteran with a service-related disability, you may be exempt from the VA funding fee. |
VA funding fees aren’t just for first-time homebuyers. Any time you take out a VA loan, a funding fee will be involved, unless you’re exempt due to a disability.
The funding fee increases significantly for 0% down VA loans after the first time you use the benefit. Here’s where making a down payment becomes all the more useful, because the funding fee remains relatively low for subsequent use loans as long as you can put down 5% or more.
| Down payment | Funding fee |
|---|---|
| 0% | 3.60% |
| 5% but less than 10% | 1.65% |
| 10% or more | 1.40% |
Funding fees for cash-out refinance mortgages are a flat 2.3% rate for a first use.
For subsequent uses, the flat rate is 3.6%
The funding fee for an interest rate reduction refinance loan is a flat 0.5%.
Exact closing cost items and amounts vary based on your lender, the home you’re buying, where it’s located, and a number of other factors.
But the following are common closing cost items with rough estimates of how much they might cost. Remember, though, that these are just estimates.
If you want to know much you’ll pay in closing costs, request quotes from a few lenders. They’ll provide you with loan estimates that break down all of the expenses associated with the mortgage.
The origination fee is charged by the lender. The fee covers the cost to take and process a loan application. The VA allows lenders to charge up to 1% of the loan as the origination fee. But you can negotiate a lower fee.
Discount points buy down the interest rate on the VA loan and reduce your payments. The fee is not required and usually not very beneficial. With rates already so low currently, it’s likely not worth buying down the rate. It’s probably a better idea to use that money for a down payment or to keep in an emergency fund.
Lenders will pull your credit report to check your credit score and history, and they may pass the cost on to you.
VA loans require an appraisal from a VA-approved appraiser. Home inspections are usually optional, but it’s a good idea to schedule one. The inspection can reveal serious concerns with the home, and you want to know as much about the property as possible before you buy it.
The title report and insurance cost depends upon the home’s location, your loan amount, and the price of the home. Title insurance is important because it protects both the lender and borrower against lawsuits challenging ownership of the property.
A property survey protects the borrower from any property line disputes with neighbors, because a professional has mapped out and attests to the property’s boundaries. Having a professional survey also gives you legal recourse if property line disputes come up. However, these are not typically required when you buy a home.
Lenders can’t charge veterans for attorney’s fees, but the VA does allow veterans to pay attorney fees for title work. The VA also allows veterans to seek independent legal counsel for such things as sales agreement and lending document reviews. Legal fees vary depending upon individual attorney or law firm rates.
If you plan to pay discount points to lower your interest rate, those will be included in your closing fees. You’ll also need money for prepaid property taxes and insurance.
Now that we’ve covered costs you may be responsible for, let’s look at the fees the VA does not allow borrowers to pay.
No doubt, closing costs can be expensive. But you can reduce your VA home loan closing cost in several ways.
The fourth option may be your best one. You do not have to rely on the seller for a credit, which most won’t give in this market. Likewise, closing cost assistance programs are hit and miss. But most lenders can give a credit on most transactions by simply giving you a slightly higher interest rate. In some case, you can receive thousands of dollars from a lender credit by taking a 0.25% higher rate. Ask your lender for specifics on your loans.
You may be able to roll the VA funding fee into the loan to reduce the amount of closing costs you need to buy a home with a VA loan. Sellers can pay up to 4% of the loan amount toward your closing costs, and you can also apply for closing cost assistance if it’s available in your area and you meet the eligibility requirements (these vary by program).
Closing costs usually total between 2-5% of the loan. On a $200,000 loan, closing costs might range from $4,000 to $10,000.
You can negotiate with the seller to pay some of the closing costs (the VA allows sellers to cover up to 4% of the loan in closing costs). Your lender may also be able to roll your VA funding fee into the loan.
Additionally, the lender can give you a credit in exchange for taking a higher interest rate. Sometimes, you only need to take a slightly higher rate to receive a substantial amount from a lender credit.
If you’re ready to buy a home but have limited cash upfront, don’t set your homeownership dreams aside. You may be able to buy a house with a VA loan for less money out-of-pocket than you think.
A VA lender can talk you through your options and help you create a plan for getting into your new home.
*A down payment is required if the borrower does not have full VA entitlement or when the loan amount exceeds the VA county limits. VA loans subject to individual VA Entitlement amounts and eligibility, qualifying factors such as income and credit guidelines, and property limits. Fairway is not affiliated with any government agencies. These materials are not from VA, HUD or FHA, USDA or RD, and were not approved by VA, HUD or FHA, USDA or RD, or any other government agency.
Some references sourced within this article have not been prepared by Fairway and are distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway.
