Whether stationed abroad or serving stateside, the men and women of the American armed forces get to enjoy a bevy of benefits once their tenure in the military ends. From specially catered health benefits to free college through the Post-9/11 GI Bill, those benefits also extend to housing assistance through Veterans Affairs-backed home loans. And while those loans come with great terms and zero need for a down payment, they still have some added costs attached.
- Veterans Affairs offers home purchase loans, refinancing loans, and a direct loan for Native American veterans.
- Funding fees for VA-backed construction and home purchase loans range anywhere from 1.4% to 2.3% for the first use. Rates remain largely flat after first use.
- Certain costs are only paid by the seller, while others will be up to the buyer and the seller to negotiate who pays.
What are Mortgage Closing Costs?
While the home buying process is already an expensive effort, mortgage closing costs close the gap between the property's final price and added expenses that go into completing the purchase. Those additional costs, which are sometimes called "settlement charges," are paid to the mortgage lender for creating and servicing the loan. Closing costs include things like origination fees, appraisal fees, land surveys, taxes, and other associated charges. While the buyer will be responsible for paying a majority of these fees, some costs are covered by the seller, while others can be negotiated.
In recent years, the average closing costs for a homebuyer has been between approximately 2% and 5% of the total loan amount. According to the National Association of Realtors, the median existing-home sales price in June 2021 was $363,300. If someone bought at home at that price and the mortgage had 5% in closing costs attached to it, the final cost would be an additional $18,165.
An outline of these costs is included in the loan estimate that lenders are required to provide within three business days of receiving a mortgage application. In many cases, those initial closing cost estimates may increase or decrease slightly. If that's the case, the final amount will be disclosed next to the original estimate, along with a column outlining the difference, in the lender's closing disclosure form, which is provided at least three days prior to closing.
What Makes VA Closing Costs Different?
Mortgages that are backed by the VA are inherently different from normal mortgages because the Department of Veteran Affairs promises lenders that they will be able to recoup some—or all—of the loan if it gets foreclosed upon. That kind of backing significantly lowers the amount of risk the lender anticipates by providing the loan, thus allowing veterans to get approved even if they don't offer a down payment.
Since they're generally seen as a safer bet my lenders, VA-backed mortgages offer lower closing costs. While typical closing costs range anywhere from 2% to 5% of the home's purchase price, similar costs for VA-backed loans have a funding fee rate that sits between 1.4% and 2.3%, according to the Department of Veterans Affairs. Using that same example from above, a home listed at $363,300 would have only $8,356 in closing costs.
Common VA Loan Closing Costs and Who Pays Them
Though they largely function the same as other mortgages, VA-backed mortgages feature many of the same closing costs. Still, there's some variation between the costs linked to VA-backed mortgages and regular mortgages. It must be noted that according to the Department of Veteran Affairs, a seller cannot pay more than 4% of the total loan in fees, otherwise known as seller's concessions. That rule only applies to some closing costs, such as the VA funding fee. The rule doesn't cover loan discount points.
Below are some of the closing costs you can expect to see on a loan estimate for a VA-backed mortgage.
Fees the Seller Must Cover
- Real estate professionals' commission fees. Realtors have to get paid too, so any commission fees that they would collect from the sale of a home or property are covered by the seller.
- Buyer broker fee. A similar fee to the commission fees listed above, this fee is to cover any brokerage fees that a real estate broker may charge. In most cases both the listing broker and the buyer's agent's broker share in the commission.
- Brokerage fee. A brokerage fee is required when a broker is used to complete transactions or fulfill other specialized needs, including purchases, sales, and negotiations.
- Termite report. No one wants to get a house that's at risk of a termite infestation. Since the seller is trying to leave that home, they have to be responsible to prove that the house is structurally sound and not getting eaten away by the voracious bugs. This is always the seller's responsibility unless the buyer is using a reference loan.
Fees the Buyer Can Cover
- VA funding fee. This is a one-time payment that the veteran, service member, or survivor pays on a VA-backed loan. According to the VA, the fee "helps to lower the cost of the loan for U.S. taxpayers since the VA home loan program doesn’t require down payments or monthly mortgage insurance."
- Loan origination fee. This is simply the fee that a lender charges when processing a loan application. This kind of fee generally is based on the total loan amount and usually falls between 0.5% and 1% of that amount.
- Loan discount points. These points are used as a sort of tradeoff between the buyer's initial costs and their monthly payment moving forward. These points come at a financial cost, which is calculated in comparison to the loan amount. Using these points can result in a lower interest rate since you're paying more upfront.
- VA appraisal fee. If you're going to use the Department of Veterans Affairs' money to buy your new house, the property is going to need to be appraised by someone certified through the VA. This fee helps cover that appraiser's time, travel and other needs for the assessment. Unlike some of the other fees, this one can potentially be negotiated with the seller to be added to their list of concessions.
- Hazard and title insurance, state and local taxes, and real estate taxes. As the soon-to-be new owner of the property or home, the buyer will have to pay for continued hazard insurance coverage, as well as the annual taxes associated with the property.
- Recording fee. Once the sale is complete, a record of its completion will need to be noted by the local government. A recording fee is charged so the transaction can become part of the public record.