VA Loan Closing Costs

VA loans are an excellent way for veterans and active-duty military service members to borrow funds to access the property market on favorable terms. However, for the lender to finalize the loan and for the Department of Veterans Affairs to continue supporting this type of home loan, veterans must pay closing costs on their mortgage.

VA loan closing costs usually amount to 3 to 6% of the loan’s value. While certain strategies can reduce closing costs, let’s first examine them and their costs.

What Are Closing Costs?

Closing costs are the fees and expenses you pay when finalizing a mortgage, including a VA loan. They typically range from 3% to 6% of the home purchase price and cover various services and processes required to complete the home-buying transaction.

While several VA loan benefits exist, including a zero-down payment requirement for most borrowers, closing costs are still required. Some of these costs are specific to VA home loans, while others are common to all mortgage loan types.

VA Funding Fee

The VA Funding Fee is a major component of VA loans and directly supports the VA loan program so that it is available for future generations of service members. 

The amount you’ll pay depends on several factors and ranges from 0.5% to 3.3%. The level of the funding fee depends on the down payment the borrower makes (although it’s not compulsory), their credit score, their income level, and other features that influence the risk to the lender.

Certain veterans who apply for a VA loan are exempt from this fee entirely, though, including those receiving VA disability compensation and Purple Heart recipients serving in an active-duty capacity.

Other Common Closing Costs

VA Loan Origination Fee

The VA loan origination fee covers the lender’s administrative costs for processing your loan. VA rules allow lenders to charge up to 1% of the loan amount for this fee.

However, some lenders may waive this fee or roll it into the interest rate. Discuss this fee with potential lenders and compare offers, as it can impact your closing costs.

Appraisal fee

The appraisal fee is usually around $500 and covers the cost of having the property professionally evaluated to determine whether the home’s value matches the home purchase price. The VA requires this appraisal to verify the property meets its minimum property requirements, which are designed to protect both the veteran and the lender.

Credit report fee

Lenders charge a credit report fee to access your credit history from the major credit bureaus. This fee usually costs between $30 to $50. The credit report provides lenders with information about your creditworthiness, including your credit score and history of managing debt. This information helps lenders determine your eligibility for a VA home loan and what interest rate to offer.

Title search and title insurance

When buying a home, title-related costs range from $300 to $2,500, depending on the property’s location and value. The title search involves an examination of public records to confirm the property’s legal ownership and uncover any claims or liens against it. Title insurance protects both you and the VA lender from future claims against the property that might have been missed during the initial title search.

Recording fee

The recording fee is paid to the local government (usually the county) to officially record the property transfer and new mortgage. This underwriting and processing fee varies widely depending on your location but usually ranges from $20 to $250. This recording establishes public notice of your ownership and the lender’s interest in the property.

Discount points

Discount points are a form of prepaid interest on your VA mortgage. Each point costs 1% of your total loan amount and contributes to an interest rate reduction of 0.25%. For example, on a $200,000 loan, one discount point would cost $2,000 and might lower your interest rate from 3.5% to 3.25%. You prepay the discount point to benefit from a lower interest rate throughout the lifetime of your mortgage.

Who Pays Closing Costs on a VA Loan?

While you might assume it’s the veteran who covers closing costs in a VA loan transaction, this is only true for specific costs. The VA requires eligible veterans to only pay for some closing costs, known as “allowable fees,” but prohibits them from paying others, called “non-allowable fees.”

Allowable fees include the VA appraisal fee, credit report, origination fee, and title insurance. Non-allowable fees may include attorney fees, brokerage fees, or prepayment penalties.

The seller, lender, or real estate agent often covers non-allowable fees. In some cases, these parties may also offer to pay some of the allowable fees as part of the negotiation process.

Strategies to Reduce Closing Costs

There are several ways to potentially lower your out-of-pocket expenses for closing costs.

Negotiate with the Seller

One of the most effective ways to reduce costs when you close your VA loan is to negotiate with the seller to cover some or all of these expenses. This strategy, often referred to as “seller concessions,” can be particularly effective in a buyer’s market or if the property has been on the market for a while.

VA loans allow sellers to contribute up to 4% of the home’s appraised value towards the buyer’s closing costs and other concessions. This can reduce your upfront expenses. 

Seller concessions are part of the overall negotiation process. Be prepared to justify your request, especially in competitive markets, and offer a slightly higher purchase price in exchange for the seller covering more of the closing costs.

Lender Credits

Many lenders offer what’s known as “lender credit.” In this arrangement, the lender agrees to cover part of your closing costs in exchange for a slightly higher interest rate on your mortgage. For example, a lender might offer to cover $5,000 in closing costs in exchange for increasing your interest rate by 0.25%. This could save you money upfront, but you’ll pay more over the life of the loan due to the higher interest rate.

Find the Best Offer

Each lender sets its own fees and interest rates, so you may find significant variations in closing costs and loan terms. Also, don’t be afraid to negotiate with lenders. If you receive a better offer from one lender, you can ask another if they’re willing to match or beat it.

Here at Society Mortgage, we pride ourselves on doing our best to offer every veteran the best terms they can find on the market. VA loans can make it easier to purchase a home by reducing upfront costs and improving home affordability, helping veterans and service members achieve better home affordability in their home-buying journey.

Closing Costs on VA Loans

VA Closing costs are an unavoidable part of the home-buying process. However, you can work around them and find options that lower them to more reachable levels.

The VA loan program is designed to make homeownership more accessible for those who have served our country. Don’t let closing costs deter you from applying for a VA loan with Society Mortgage. We are a VA-approved lender and offer competitive mortgage rates on our VA loans. 

With professional advice from our Society Mortgage Loan Officers, you can get the best terms for your VA loan. Contact us today, and one of our Loan Officers will be happy to give you a complete overview of your options and offer any further information you need!