What to Know About VA Loan Closing Costs

What Are Closing Costs on VA Loans?

VA loans are special mortgages provided as a benefit to qualifying active and former members of the U.S. armed services, National Guard members and reservists and their eligible survivors. They are available from the VA itself through a program called VA Direct, and through VA-backed loans issued by private lenders.

Like virtually all mortgages, VA loan terms include closing costs—fees and other charges you must pay when you finalize your home purchase. Some closing costs, such as local taxes and fees and payments to property inspectors and real estate agents, are standard for all mortgages issued in your community; other closing costs are specific to VA loans.

Learn more: VA Loan Requirements

What Do VA Closing Costs Include?

Specific closing costs can vary based on lender policies and local taxes and fees, but here are some of the costs you can expect to see at a VA loan home purchase closing:

• VA funding fee: This is a special charge, unique to VA loans, intended to help defray the cost of issuing and insuring low-cost loans for service members and their families. The funding fee is applied as a percentage of the total loan amount and can vary based on whether it's your first VA loan and how much of a down payment you make on the house. More on that below.
• Origination fee: As with most mortgages, the lender issuing your loan typically will charge an upfront origination fee when it issues the loan. This may take the form of a flat percentage of the loan amount or a series of itemized charges. What's unique about VA loan origination fees is that they're capped at 1% of the loan amount.
• Appraisal fee: Lenders customarily only issue mortgages contingent on results of a home appraisal. Appraisals are conducted by a professional chosen by the lender and paid for by the buyer to confirm that the loan amount is in line with the home's condition and market value. The VA has appraisal requirements, too, but its standards are more stringent than those required for other mortgage types.
• Discount points: Like other mortgage lenders, the VA and its authorized lenders let you lower the interest rate on your loan by making payments known as discount points at closing. Purchasing these points is optional. Each point equals 1% of the loan amount, and each point you pay typically deducts 0.25% from the interest rate on your loan.

How Much Are VA Closing Costs?

You can generally expect closing costs on a VA loan to range from 3% to 6% of the loan amount, but it's important to remember that the private lenders who issue VA loans have leeway, within VA guidelines, to set the fees and interest rate on your loan.

So, if you purchase a $300,000 home, you can expect closing costs to run you between $9,000 and $18,000.

Learn more: The Complete Guide to Closing on a House

How Do VA Closing Costs Differ From Other Loans?

Closing costs on VA loans closing differ from those on most other mortgages in a few significant ways.

VA Funding Fee

This fee, which is unique to VA loans, helps defray the cost to U.S. taxpayers of insuring discounted loans for veterans.

The amount of the funding fee depends on a few variables:

• The type of loan you get: VA loans are available for use in purchasing or building a home, doing repairs on property you already own or refinancing an existing VA loan.
• Whether this is your first use of your VA loan benefit: An enduring benefit of the VA loan program is that you can use it repeatedly to purchase primary residences over the course of your life. If you make a down payment of 5% or less, the funding fee is lower the first time you take out a VA loan than it is on subsequent loans.
• Your down payment amount: The ability to purchase a home with 0% down is one of the most celebrated features of VA loans. But if you make a down payment of 5% of the home purchase price, you can reduce your funding fee to 1.5%. Upping the down payment to 10% or more reduces the funding fee by another 0.25%.

Source: Department of Veterans Affairs

Note: If you previously used a VA loan to purchase a manufactured home, you'll be eligible for the first-time funding fee on financing of a fixed-construction home.

The VA funding fee can be financed along with your loan so that you pay it off (with interest charges) over the life of your loan.

No Down Payment Required

VA loans are often issued with a 0% down payment, an arrangement that greatly lowers the barrier to homeownership for those who qualify. You still have the option of making a cash down payment, however, and doing so reduces the amount you have to borrow and can also reduce the amount of your VA funding fee.

No Mortgage Insurance Requirement

If you put down less than 20% of the purchase price on a conventional mortgage or loans backed by the Federal Housing Administration (FHA), you typically are required to add a mortgage insurance premium to your monthly payment for at least a portion of the loan term. This insurance, which protects the lender in case you fail to repay your loan, is not required on VA loans.

Origination Fee Is Limited to 1%

VA rules limit the lender's origination fee to 1% of the loan amount. This doesn't count any discount points you may pay toward reducing your interest rate, and may be in addition to itemized charges the lender pays on your behalf, such as local filing fees and the appraiser's service charges. Any itemized charges from the lender must be simple reimbursements, without markup or service fees.

Who Pays Closing Costs on VA Loans?

There's a significant amount of flexibility in determining how closing costs are allocated among the buyer, seller and lender in a VA loan.

Buyer

The buyer is responsible for making their down payment at closing, and the default assumption is that the buyer will cover all other closing costs. Some costs costs you can expect to pay at closing include:

• VA funding fee
• Commissions and fees for your real estate agent
• VA appraisal fee
• State and local taxes
• Hazard insurance premiums
• Title insurance and recording fees
• Credit reporting fees

Seller

VA rules permit you to negotiate with the seller to have them cover some or all of your loan-specific closing costs.

In addition, the seller can offer concessions on the sale, provided they don't exceed 4% of the home's "reasonable value," an amount spelled out in the documents furnished with your VA Loan offer. Seller concessions can encompass:

• Full or partial payment of any or all the costs listed above
• Inclusion of appliances or other items of value with the home, at no cost to you
• Payments toward your non-loan-specific debts, such as credit card balances or taxes, to enable you to qualify for better lending terms

Learn more: Can You Negotiate Closing Costs?

Lender

VA rules allow you to reduce your closing costs by way of lender credits—an arrangement by which the lender charges a higher interest rate on the loan in exchange for requiring less cash upfront when you finalize your purchase. This may seem like an accommodation on the lender's part, but the buyer bears the cost over the course of the loan's repayment term.

How to Pay VA Closing Costs

When determining how to pay your VA closing costs, here are some of your options:

• Pay out of pocket. On the day of your closing, you can bring a cashier's check in the amount of your closing costs.
• Ask the seller for help. You can negotiate with the seller to have them share or even pay all of your loan-related closing costs. Note that the seller is not obligated to cover closing costs or to make other concessions, and that it may be challenging to get them in a competitive real estate market.
• Roll costs into the loan. You can finance your VA funding fee by adding it to the mortgage amount and paying it off over the life of the loan. By doing so, you are effectively borrowing that sum at the same interest rate that applies to your loan, and the total cost of the loan will increase accordingly.

Frequently Asked Questions

The Bottom Line

The VA loan program is one of the country's most durable ways of saying "thank you for your service" to veterans, service members, reservists and their survivors. They present a rare opportunity by enabling the purchase of a home with no down payment, but they also feature unique closing costs that may make other mortgages more affordable in the long run.

When shopping for a VA loan or any other type of mortgage, it's important to know how favorably lenders will view your credit. Checking your FICO^® Score^☉ can help you understand your credit situation. If your credit scores could stand improvement, building credit before you buy a house could save you money over the life of your mortgage.