A Complete Guide to VA Loan Closing Costs
Retired, as well as active military service members and their families, can get a VA mortgage on easy terms. This mortgage requires no down payment and offers lower interest rates compared to conventional loans. The best part of this loan program is that it promises to repay a portion of the loan in case the borrower defaults. This is promised in order to minimize the loss for lenders who provide these loans.
Besides the advantage of no down payment, this type of loan also has a distinct advantage of including closing costs in the loan amounts. These are allowable costs, and the VA has imposed a limitation on charging these costs to borrowers, which helps them save a significant amount of money. The average closing costs for VA loans varys. Here are some of the examples of closing costs that borrowers might be charged with on a VA loan:
Average Amount - The average amount of closing costs that are charged to veterans ranges between 2% and 5%. Depending on the location and third party fees, the costs may be higher than 5%. Escrow service fees, government fees and property taxes are added to the closing costs.
Allowable Costs – As mentioned earlier, allowable costs include the closing costs that are charged to borrowers. These costs also include an origination fee of 1%, which is charged for the service of processing the loan. Apart from origination fees, veterans also need to pay for appraisal, their credit report, escrow taxes, insurance, title and discount points if they want to lower their interest rate.
Funding Fee - VA loans require a one-time, upfront payment known as a funding fee. The borrower needs to pay this funding fee at the time of closing the mortgage. This fee goes directly to the Veteran’s Administration to pay for the costs of the VA loan program. This fee is not paid in cash, as most homebuyers choose to finance the the fee into the loan amount.
Origination Fees – The Department of VA covers the amount of the lender’s compensation on VA loans to 1% of the total loan amount. The fee is used to compensate the lender. Some of the items like processing and underwriting may not be charged if veterans need to pay this 1% fee.
Discount points - Veterans can pay discount points, provided that the fee reduces their interest rate directly. Discount points are different from an origination fee. This is because the money is used to buy a lower rate of interest rather than compensating the lender.
The VA loans closing costs are quite different than FHA and conventional loans, especially with regard to who is responsible for paying the particular fee. In case borrowers have any question about who needs to pay a particular fee, they should directly contact a reputed mortgage company that has expertise in dealing with specialty mortgages.