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When it comes to buying a home, closing costs are an inevitable part of the process. For veterans, active-duty military members, and certain members of the National Guard and Reserves, the VA loan offers a unique opportunity to purchase a home with no down payment, potentially lower interest rates, and reduced closing costs. However, even with these benefits, buyers still need to understand how VA loan closing costs work. This article will take a deep dive into VA loan closing costs, including who pays them, what they entail, and how the VA funding fee plays a role in these expenses.
Understanding Closing Costs on a VA Loan
Closing costs are the fees and expenses incurred during the home-buying process that must be paid before the home loan can be finalized. These fees can vary widely depending on the lender, the location of the property, and the type of loan being processed. VA loan closing costs are generally lower than traditional loans, thanks to specific guidelines designed to benefit veterans and service members. However, there are still costs involved that need to be addressed.
Common Closing Costs for VA Loans
While there are a number of fees that could be included in closing costs, the most common ones associated with VA loans include:
1. VA Funding Fee
The VA funding fee is a mandatory one-time fee paid to the Department of Veterans Affairs. It is designed to help offset the costs of the VA loan program and keep it sustainable for future generations of veterans. This fee is one of the most significant closing costs for VA loans and can vary depending on several factors, such as the type of service, whether it's the borrower's first VA loan, and the amount of the down payment (if any).
2. Appraisal Fee
An appraisal is required by the lender to determine the value of the home you're purchasing. The cost of the appraisal will vary depending on the location and the appraiser, but it is typically part of the closing costs.
3. Title Insurance
Title insurance protects the lender (and, in some cases, the buyer) from any issues with the title of the property, such as ownership disputes or liens. In most cases, the lender will require title insurance as part of the closing process.
4. Recording Fees
Local governments typically charge a fee to record the transfer of ownership and the mortgage on the property. These recording fees are generally part of closing costs for any type of mortgage loan, including VA loans.
5. Credit Report Fee
Lenders will pull your credit report to assess your financial history and determine your eligibility for the loan. There may be a small fee associated with this process.
6. Inspection Fees
Some lenders may require a pest inspection, home inspection, or both before approving the loan. The cost of these inspections will typically be part of your closing costs.
7. Origination Feeswho pays closing costs on a va loan
Some lenders charge an origination fee, which covers the costs of processing the loan application and underwriting the loan. This fee can vary from one lender to another.
8. Prepaid Costs
Prepaid costs are amounts that may need to be paid at the time of closing to cover things like property taxes, homeowner's insurance, and mortgage insurance (if applicable). These costs are usually prorated and paid upfront.
Who Pays Closing Costs on a VA Loan?
One of the most common questions asked by veterans and service members is: Who pays the closing costs on a VA loan?
The short answer is that the buyer typically pays for the closing costs, but the seller may also contribute. There are specific rules in place that allow for the allocation of closing costs, and the responsibilities can vary based on the circumstances of the loan and the agreement between the buyer and the seller.
Here are some ways the costs can be divided:
1. Buyer Pays Closing Costs
In most cases, the buyer will be responsible for paying the majority of the closing costs associated with a VA loan. This includes the VA funding fee, appraisal fees, title insurance, and any other fees that are customary in the area.
However, VA loan rules allow the buyer to finance certain costs (like the VA funding fee) as part of the loan amount, reducing the immediate out-of-pocket costs. The buyer can also negotiate with the seller to pay for some of the closing costs.
2. Seller Concessions
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