As a veteran, you can secure 100% financing for your home purchase. As if that isn’t benefit enough, the VA only allows you to pay certain closing costs. This can save you several thousand dollars on the loan when it’s all said and done. There is one problem, though, lenders and other third parties have fees they need paid to close the loan. So who pays the costs?
If you are lucky enough to find a willing seller, he/she can pay the costs for you. This is often the case with a VA loan, but you have to work this situation out before you sign the purchase contract.
Why Sellers Pay the Closing Costs
A seller is often willing to cover the closing costs for a veteran in order to get the home sold. If they like the bid the veteran puts on the home, they may be willing to concede a portion of the costs to close the loan. Before you assume the seller is an amazing person for doing so, there is a catch.
Typically, veterans can bid a higher amount on the home in order to get the costs covered. Let’s say for example that you are a veteran and you are willing to pay $200,000 for a home. You know that the home is worth an estimated $210,000 though. If you offer to buy the home for $203,000 in exchange for the seller covering $3,000 of your closing costs, you call it even. You can get the VA loan and you don’t pay any ‘ prohibited costs’ that lenders charge.
The Closing Costs Veterans Can Pay
This isn’t to say that veterans cannot pay any closing costs. The VA allows plenty of costs. These costs include:
- Credit report fees
- Appraisal fees
- Title fees
- Origination fees
- Recording fees
- Survey fees
- VA funding fee
Fees the Veteran Cannot Pay
The fees that a veteran cannot pay are basically any fees except for the fees above. The most common include:
- Attorney fees (aside from any attorney fees tied to title services)
- Underwriting fees
- Processing fees
- Document preparation fees
- Escrow fees
Because the lender and/or third parties will likely charge some of these fees, you have to find another way to get them paid. Again, as we discussed above, the seller can take care of them. If the seller won’t, you can ask the lender for a no-closing-cost loan.
Some lenders offer this option in exchange for a higher interest rate. Typically, you’ll pay a 0.5% higher rate in order to have on closing costs. The lender basically makes the money they would have made on the closing fees in the higher interest rate. Before you accept this option, think about the extra interest you will pay over the life of the loan (usually 30 years). If you will live in this home for what you consider long-term, this may not be the best option, as it will cost more.
One way you can get around the costs the VA doesn’t allow veterans to pay is to ask the lender to lump everything into an origination fee. This is a fee you can pay. If the lender doesn’t itemize the costs, but rather just charges one lump sum, you can pay the fees and get the loan that you need.
Before you accept any closing costs from just any lender, we suggest you shop around. You’ll likely find that different lenders charge different things. For example, one lender may just charge a 1% origination fee and nothing else. Another lender may not charge the origination fee, but itemizes all of the other fees, which may include fees you are not allowed to pay.
Shopping around will allow you to find the lowest fees and the best rate. It will also allow you to see which options you have in terms of paying the closing costs. If you have a seller unwilling to cover the closing costs, you will have to find a lender that will work with you, while keeping your loan affordable.