VA loan closing costs: Explained for beginners

Quick insights

• Closing costs are usually 2%–5% of the mortgage value.ec-ccc-fannie-mae
• Closing costs can be negotiated between the buyer and seller. Other seller’s concessions are capped at 4% of the home’s value.ec-va-funding-fee-and-loan-closing
• Your lender may allow you to roll the VA funding fee into your loan; however, this will affect how much interest you pay over the life of the loan.

VA loans can be an attractive mortgage option for qualifying servicemembers. However, despite their perks, they still come with closing costs. We’ll explain how much you can expect to pay, what goes into closing costs and how the VA funding fee works.

How much are VA loan closing costs?

Typical mortgage closing costs are about 2%–5% of the loan amount.ec-ccc-fannie-mae So for a $300,000 loan, that would be $6,000–$15,000. VA loan costs can be lower because certain lender fees are capped. The exact amount you owe will be based on factors like your lender, the loan amount, property location and your VA funding fee status.ec-va-funding-fee-and-loan-closing

Who pays closing costs with VA loans?

Either the buyer or seller can pay for closing costs; however, there is room for negotiation as to who pays which specific costs. Seller concessions do not include payment of the buyer’s closing costs, or payment of points as appropriate to the market.

Example: If the market dictates an interest rate of 7.5% with two discount points, the seller’s payment of the two points would not be a seller concession. If the seller paid five points, three of these points would be considered a seller concession.

For VA loans, seller concessions are capped at 4% of the home’s value.ec-va-funding-fee-and-loan-closing

What’s included in VA loan closing costs?

Here are some of the components that can make up VA loan closing costs:ec-va-funding-fee-and-loan-closing

• VA funding fee: This is usually a single payment the borrower makes on a VA-backed home loan. (We’ll expand on this below.)
• Loan origination fee: This fee is charged by your lender to process your application.
• Loan discount points: Also known as mortgage points, purchasing them means paying your lender up front for discount points that can lower your interest rate on the loan. These are optional and don’t have to be included in the loan.
• VA appraisal fee: This is the cost of a professional home appraisal to ensure it meets VA requirements.
• Hazard insurance: This is coverage for the physical structure of your home in the event of a natural disaster.
• State and local taxes: These taxes must be paid to local and state governments based on the assessed value of the property.
• Title insurance: This protects the buyer against potential ownership issues with the title.
• Recording fee: This administrative fee is usually paid to the county clerk’s office.

Depending on your lender and where the property is located, you may not be responsible for all of these components. The cost of each will also vary based on the property location and the lender you choose.

VA funding fee

Recipients of VA loans are typically required to pay the VA funding fee unless they qualify for an exception. The funding fee lowers the cost for U.S. taxpayers backing loans that don’t require monthly mortgage insurance.ec-va-funding-fee-and-loan-closing

The VA funding fee is calculated as a percentage of the loan amount and fluctuates based on the down payment amount. Here’s how much you’ll owe if this is your first use of a VA loan:ec-va-funding-fee-and-loan-closing

• 2.15% if you put less than 5% down
• 1.5% if you put 5% or more down
• 1.25% if you put 10% or more down

After your first use, if you’re putting less than 5% down, the rate jumps to 3.3%. If you put more than 5% down, the rates stay the same.ec-va-funding-fee-and-loan-closing You may be able to roll the VA funding fee costs into the loan. Just remember that this will affect how much interest you pay over the life of the loan.

You may also have the option to deduct the VA funding fee from your taxes. If you’re interested, you may want to speak with a tax professional.

Tips for lowering VA loan closing costs

Coming up with 2%–6% of a mortgage loan in closing costs can be an obstacle for prospective buyers. Here are some ways you can attempt to lower the upfront costs.

Shop lenders

The specific breakdown of closing costs will vary by lender. You can shop around and talk to different lenders to get an idea of what their closing costs will be. Lenders can also run promotions that could help offset these costs further.

Negotiate with the seller

You have the ability to negotiate closing costs with the seller as part of the purchase agreement. Just keep in mind that seller closing cost concessions are capped at 4% of the home’s reasonable value for VA loans.ec-va-funding-fee-and-loan-closing

In summary

VA loans offer a lot of flexibility when it comes to closing costs. You may be able to negotiate with the seller or simply pay them outright. Knowing what to expect can help you make a plan and a budget.

VA loan closing cost FAQs

What closing costs do you pay with a VA loan?

This will vary by lender, where the property is located and what you negotiate. Typically, it will include the VA funding fee and other costs, like the loan origination fee, title insurance and recording fees.

How do you avoid closing costs with a VA loan?

More than likely, you’ll probably need to pay some closing costs to secure a VA loan. However, eligible borrowers may be able to waive some closing cost components, like the VA funding fee, by meeting additional requirements, such as having a service-connected disability.

What is the 4% rule on a VA loan?

Seller concessions are limited to 4% of the home’s reasonable value.ec-va-funding-fee-and-loan-closing This is to protect veterans from taking on loans they might struggle to afford and to keep sellers from artificially inflating the property value.