Basic Closing Costs for VA Buyers and Sellers
All home loans come with closing costs. But what makes the VA loan different is that closing costs are often limited for the benefit of the veteran buyer. This blog post explains the benefit program of the Department of Veterans Affairs and how closing costs are managed between buyers and sellers in a VA-backed loan.
Buyers are 'restricted' by the VA on what they can pay
The primary advantage of using a VA loan is its 0% down payment incentive. But what makes it advantageously unique on the part of the eligible buyer is the limitations imposed by the Department of Veterans Affairs on loan fees that the veteran or active-duty member is not allowed to pay. Called "non-allowable" fees, these costs are often covered by the seller, lender, or real estate agent. The non-allowable costs and fees are:
- Pest inspections on purchase transactions (in 41 states)
- Broker fees/agent commissions
- Loan prepayment penalties
- Attorney fees (non-title related)
- Excessive recording fees
The VA also limits the charges imposed by the lender to the borrower that cover their origination and administrative costs.
Sellers may contribute a lot
Sellers involved in a VA purchase transaction has the option to cover a buyer's mortgage-related closing cost and contribute up to 4% in the form of "concessions". These costs may include origination fees, appraisal, title work, etc. Concessions often go toward other expenses related to buying a home. Examples of these are prepaid taxes, homeowner's insurance, collection payments, and even judgments for the buyer.
It is understood that many VA buyerrs might come in need of assistance with regard to their closing costs, but sellers have to remember that sellers ARE NOT required to pay for a VA buyer's closing costs. It is more of a home seller's patriotic prerogative and is not imposed as a rule for all sellers involved in VA loan transactions. In the end, each transaction is different and will take its own course to reach a beneficial closing deal.
Buyers can finance the VA funding fee
The VA home loan program is partly funded by the VA Funding Fee- a contribution based on the buyer's service history, disability status, and use of a VA loan benefit in the past. Some VA buyers are exempted from the said fee because they receive compensation for a service-connected disability. Buyers who are not exempt don't have to make an upfront payment. Many of them, in fact, choose to finance the cost alongside their loan in spite of the option to let the seller pay the fee as part of the closing concessions.
Ultimately, the VA loan program is designed to make home ownership easy and convenient for veterans and military families, especially with settling closing costs. With the right kind of understanding, a VA-backed home purchase can close as easily as a home purchase using conventional loan options.