VA Loan Closing Costs for VA Home Loans 2016
VA Home Loan Closing Costs and Fees: What to Expect
A down payment is not required on VA loans. However, the veteran has to pay for closing costs, or receive enough seller or lender credits to cover them. VA loan closing costs average around 1% – 3% of the loan amount on bigger home purchase prices, and 3% – 5% of the loan amount for less expensive homes.
The seller is allowed to pay all of the veteran’s closing costs, up to 4% of the home price. So, it is possible to avoid paying anything out of pocket to close your home purchase. Tip: If you have little or no funds available for closing cost, let your real estate agent know that you are purchasing your home with a VA loan. Your agent may be able to request that the seller pay for some or all of your closing costs.
VA Closing Cost Examples
Below are some definitions and rough estimates of what closing costs might be on a VA loan. Keep in mind that the types of fees and their amounts vary greatly by geographic location. Your scenario might look a lot different. The best way to get a better estimate is to talk to a loan professional about your situation. But this will give you a general idea of potential costs.
VA Fees and Lender Fees
The VA limits the amount of fees the lender can charge. This is a great benefit to the VA loan.
VA Upfront Funding Fee
This fee goes directly to the Veteran’s Administration to defray the costs of the VA program. This is not a fee that is generally paid for in cash at closing, because usually VA homebuyers opt to finance it into their loan amount. If the fee is wrapped into the loan amount, it does not increase the total amount of mone needed to close the loan.
1% Origination Fee
The VA caps the lender’s compensation on VA loans to 1% of the loan amount. This fee is meant to compensate the lender in full. Fees for items such as processing and underwriting may not be charged if this 1% fee is charged to the veteran.
Discount points can be paid by the veteran provided the fee goes directly to reducing the interest rate. Discount points are separate from the origination fee, because this money is used to buy a lower interest rate rather than to compensate the lender.
Third Party Fees
Companies involved in the transaction other than the lender are called third parties. Examples are title and escrow companies, credit reporting agencies, and appraisers. Their charges are called third party fees. Here are common fees and estimated amounts.
Appraisal – $500
The lender will request an appraisal straight from the VA website. VA will then select an approved VA appraiser. The VA appraiser will determine the value of the home as well as ensure it meets VA minimum property requirements for VA loans. Talk to an expert VA lender if you have more questions about the VA appraisal process.
If you are using a VA streamline to refinance your home, an appraisal is not required and this fee will not apply.
Title Report/Title Insurance Policy – $300 – $2500+
This fee varies greatly because it is based on the purchase price of the home, the loan amount, and geographic location. The title fee on a small purchase price may be only a few hundred dollars, while a high purchase price can soar well over $1000. The title report and title insurance protects the lender and owner of the home in the case that someone in the future claims they have ownership rights to the house, and wins in a court of law. If that were to happen for any reason, the title insurance company would reimburse the lender and owner of the home for the loss.
There are generally two types of title fees: 1) the lender’s title policy which protects the lender, and 2) the owner’s policy which protects the future owner. In some areas, the seller of the home pays for the owner’s title policy, and the buyer pays of the lender’s policy. But it depends on local customary practice. Generally the owner’s title policy is more expensive. In some cases the buyer pays for both the owners policy and the lender’s policy, in which case the title fee more than doubles. For instance, if the lender’s title policy is $450 and the owner’s title policy is $650,and the buyer has to pay them both, it would turn out to be an $1100 fee. Make sure your purchase and sale contract defines which parties are paying which fees so there are no surprises at the end.
Recording Fee – $20 – $250
This fee is set by the county or jurisdiction where the home is located. Recording just means that the sale or refinance becomes public record, so that the county knows who is responsible to pay taxes on the home, which banks have loans out on the home, etc.
Credit Report Fee – $35
This is a fee that is charged by a credit reporting agency. The lender must pull a credit report to determine your past credit history. The report usually shows three credit scores from the major credit bureaus – Experian, Equifax, and Transunion – and the middle score is used for qualification purposes/
Flood Certification – $20
The lender will pull a flood certification, or “flood cert” on the property to determine whether it’s in a flood zone. Most properties are not in a flood zone, but if the property you want to buy is, you will need to purchase flood insurance.
Survey Fee – $400
A company will survey the property to determine where all physical property lines are on the property.
Attorney Fees – $400+
Attorneys can help in negotiating and interpreting the sales contract as well as help with a timely closing. They are not required in every state. In states that require them, it’s best to call around and find an attorney who knows real estate and is not too expensive. Note that the VA does not permit the veteran to pay an attorney for anything besides title work.
Prepaid items are items the buyer has to pay in advance. Lenders require insurance policies and taxes to be paid in advance. Not paying for taxes and insurance can jeopardize the integrity of the collateral for the loan, which is the house.
Flood Insurance – $300 – $1000+
This is an ongoing insurance policy, paid every year, on any home that is in a flood zone. The lender making the loan requires the home to be insured against flooding, which is not covered by the standard homeowner’s insurance policy. The flood insurance first year’s premium will need to be paid for at closing of the loan, which could add quite a bit to your overall cash needed to close. The insurance is based on the value of the home being insured, so it can vary greatly.
Homeowner’s insurance – $300 – $1000+
This is the standard insurance policy that protects against things like fire, trees falling on the home, etc. It does not cover flooding and may or may not cover earthquake-related damage. The cost is based on the value of the home being insured. The full year’s premium will be due at closing.
The lender requires this prepayment because they want to make sure any damage done to the home will be repaired. Homeowner’s insurance is just like any insurance policy – it renews every year and will need to be paid again each year. Usually, the lender collects 1/12th of the yearly premium with the mortgage payment, and pays the insurance company yearly.
Escrow Deposit/Tax and Insurance Reserves – $300 – $2500+
This fee varies greatly because it is determined by 1) the taxes and insurance on the home; 2) the time of year the sale closes, and; 3) when taxes are collected in the property’s jurisdiction. These funds are required to “prime the pump” so to speak, so that when taxes and insurance become due, there’s enough in reserve to pay them. The best way to estimate how much it will cost to establish an escrow deposit, you’ll need to get an estimate from your loan professional after the property is chosen and an estimated closing date is established.
Fees Not Allowed to be Charged to the Veteran
Some fees are not allowed to be charged, per VA loan guidelines.
If for anything besides title work.
Escrow Fee/Settlement Fee/Closing Fee
The VA does not allow the veteran to pay an escrow fee. The escrow fee varies greatly and can be quite expensive, so this is a great benefit to the VA loan. Although the veteran does not pay for the escrow fee, it’s good to know what the escrow company does.
The escrow company is responsible for collecting and distributing all monies involved in the transaction. Escrow will receive the earnest money, any wired amounts from banks, down payments from the buyer, closing cost assistance from the seller, etc. The escrow company then divvies out the money to the appropriate parties – real estate agent commission checks, a wire paying off the existing loan on the house, a wire to the seller for any proceeds from the sale, etc. In addition, the escrow company makes sure all parties sign all the final loan documents and sale documents. When it’s all said and done, escrow records the sale with the appropriate jurisdiction, such as the county government.
Closing Protection Letter (CPL)
The CPL fee is often included in the escrow fee but sometimes charged separately. It is a letter that makes the title company responsible if escrow does not appropriate loan proceeds correctly.
Document Preparation Fee
Fee charged by escrow for preparing final loan documents.
Underwriting Fee/Processing Fee
Fees charged by the lender for processing and underwriting the loan.
Fees charged by the lender to lock the interest rate.
Courier Fee/Postage Fees
Sometimes there are original documents that need to be hand-carried or sent via overnight service, and can’t be emailed or faxed. In this case, the escrow company will often charge a courier fee to ensure these services are paid for. The veteran is not allowed to pay these fees however, and must be covered by the lender.
Fees charged by escrow to send a notary to the borrower for a signing appointment outside escrow’s office.
This is a fee the lender sometimes charges up front before the borrower takes an application. This is not allowed on VA loans.
Tax Service Fee
This fee is paid to the mortgage company to ensure they pay the real estate taxes.
Mortgage Broker Fee
Sometimes charged by mortgage brokers when they broker a loan out to the lender.
This list of allowable and non-allowable fees above is not all-inclusive and there may be other fees on your purchase transaction that are not listed here. In that case, it’s best to contact your VA lender to find out if the charge is allowable on VA loans.