Many veterans and active-duty service members may wonder if their VA home loan covers closing costs. The answer to this question is both straightforward and complex, as it depends on several factors related to the loan and the specific situation of the borrower.
The Funding Fee
One essential aspect to consider when discussing VA home loan closing costs is the funding fee. This fee is a percentage of the loan amount and is intended to help offset the cost of the program to taxpayers. While it does add to the overall loan amount, it can be included in the loan to reduce the upfront costs for the borrower. However, it’s important to note that the funding fee itself is not considered a closing cost.
VA Policy on Closing Costs
The Department of Veterans Affairs (VA) has specific policies regarding what closing costs can and cannot be paid by the veteran or service member. According to VA regulations, the borrower is not allowed to pay certain fees, such as broker fees or charges for document preparation. Additionally, the borrower cannot pay more than 1% of the loan amount for loan origination fees. These restrictions aim to protect veterans and ensure that they are not burdened with excessive costs.
Who Pays for Closing Costs?
While there are limitations on what fees the borrower can pay, there are still various closing costs that need to be covered. In most cases, these costs are divided between the buyer and the seller, and negotiation between the two parties can determine who pays for what. However, there are specific costs that the seller is not allowed to pay on behalf of the veteran. These include the termite report, any repairs required by the VA, and a portion of the VA appraisal.
It’s important for veterans and service members to work closely with their realtors and lenders to understand who is responsible for each closing cost and ensure that they are not in violation of any VA regulations.
Using Seller Concessions
One way to potentially minimize the out-of-pocket expenses for VA home loan closing costs is through seller concessions. Seller concessions are negotiated agreements where the seller agrees to contribute a certain amount towards the buyer’s closing costs. However, there are limits to how much the seller can contribute based on the loan type and the down payment amount. For VA loans, the seller can contribute up to 4% of the total loan amount towards the buyer’s closing costs.
Other Funding Options
If the buyer is unable to negotiate seller concessions or needs additional funding to cover the closing costs, there are other options available. The buyer can choose to pay the closing costs upfront or explore the possibility of rolling the costs into the loan amount. Rolling the closing costs into the loan can increase the overall loan balance, but it allows the borrower to avoid immediate out-of-pocket expenses.
Summary of Closing Cost Options for VA Home Loans
| Payment Option | Pros | Cons |
|---|---|---|
| Paying upfront | Avoids increasing loan balance | Requires immediate out-of-pocket expenses |
| Seller concessions | Potentially minimizes out-of-pocket costs | Subject to negotiation and limits |
| Rolling costs into loan | Avoids immediate out-of-pocket expenses | Increases overall loan balance |
In conclusion, a VA home loan can cover certain closing costs, but there are limitations and regulations that borrowers need to be aware of. Understanding the funding fee, VA policies on closing costs, and available payment options can help veterans and service members navigate the closing process effectively while minimizing their out-of-pocket expenses.