What are the closing costs and fees for a VA home loan?
Posted by admin on August 31, 2009
With a VA home loan a qualified veteran is able to get into a home with no down payment and the seller may pay closing costs (up to 6%) which is an item that needs to be considered when sales price is being negotiated. There is no mortgage insurance and credit guidelines are not as strict as conventional or FHA financing. Veterans must meet credit standards but loans are not “score driven.” VA home loan interest rates are usually much lower than those offered by other loan programs.
The Veteran has to occupy the home as the primary residence.
VA does charge an up front VA funding fee, which may be financed. If a veteran is in receipt of VA service connect disability he or she does not have to pay a VA funding fee. The VA will allow the VA borrower to include the VA funding fee in the loan amount so you don’t have to come up with that cost in cash. The VA funding fee for first time user of VA eligibility buying a home with no down payment is 2.15%. After the first use of the VA eligibility it goes up to 3.3%. If buying a home with 5% down or more the VA funding fee is less. Still, it can be rolled into the loan and is not an out of pocket expense.
The seller is allowed to pay up to 6% of the closing costs. This is important to consider when negotiating a sales contract. Initially, while there is no down payment required, the veteran does need money towards closing costs and the earnest money deposit which the seller generally requires (usually 1% of the sales price) when a sales contract is signed. The earnest money deposit is held in a trust by the escrow company until the transaction is complete. If the seller agrees to pay the closing costs then the earnest money deposit will be refunded back to the veteran at close of escrow. It is a good idea to ask the seller to credit towards closing costs when writing the purchase contract.
There are some fees the VA borrower is not allowed to pay so the seller will have to cover these fees:
- Lender/underwriting and processing fees
- Escrow, notary and doc drawing fees
There are other other fees such as title insurance and credit check fees that the borrower has to pay. Also there can be a loan origination fee of up to 1% of the loan amount (depending on the interest rate selected by the borrower) and if the borrower wants to buy down the interest rate there are fees (points) associated with that. These costs can be paid with the seller credit.
Besides the earnest money deposit (which let’s the seller know the buyer is serious), there are some upfront fees:
Appraisal fee – ($400) which will need to be paid by the VA borrower.
Home Inspection – It is highly recommended that a home is inspected by a home inspector. Fees can vary on this but range around $300 and are paid directly to the home inspection company. It is not required by VA to get a home inspection but it is wise to have the home inspected before proceeding with the purchase. The home inspector is a third party contractor who will come out and look at the structure, roof, plumbing, and electrical and give you a detailed report on the property. The borrower hires the home inspector and pays for this service at the time of inspection.
Recurring Closing costs:
Here’s where people often get stuck! There are some items when closing escrow that often confuse the borrower: These are reserves required by the lender but they are not loan fees. This is money held in a reserve account by the lender as prepaid items. These are called recurring closing costs because they continue to be paid again and again through out the ownership of the home.
Prepaid Interest – is the amount of interest due at closing to cover the period of time in between the date escrow closes and the date your first mortgage payment is due. For example, if you closed escrow on October 15th, you would have to pay interest up to October 31st. You would not make your first mortgage payment until, December 1st. It is good to close as close to the end of the month as possible to avoid having to come up with the extra cost.
Property Taxes – the lender may require 6-9 months worth of property taxes. They will add your tax payment monthly to your mortgage payment and when taxes are due they will pay this bill out of your account. If your property taxes are $200 per month that would be an extra $1200-$1800 needed to be held in reserves.
Homeowners Insurance – sometimes up to a years worth of payments. Also, lender will include this cost in your monthly PITI (Principle, Interest, Taxes and Insurance) payment and when the policy is up for renewal the lender will pay this out of your account. You will need to find your own insurance company and provide this information to the title company as soon as possible so that they can get the necessary documents from your insurance holder. This is often overlooked and can cause a delay in closing escrow. Depending on the type of coverage, you can figure this to be around $400 per year.
It is very important that your Realtor understands the kind of financing you will be obtaining so that they can negotiate with the seller and write the credit into your purchase contract. If you want to obtain 100% financing with as little out of pocket expense as possible then the seller should agree to credit back up to 6% of the purchase price to pay for the closing costs.
