VA loans come with a host of big-time benefits. The biggest one is unquestionably the ability of qualified borrowers to purchase with no down payment — and there’s plenty more advantages as well. But the way the VA approaches closing costs might be a close second.
Every mortgage comes with closing costs (even those advertised as “no closing cost” loans). A home loan is a product, and like any kind of good or service there are related costs. As part of its mission to help level the playing field and get veterans into homes, the VA limits what borrowers can pay in closing costs. And there are actually some costs veterans aren’t allowed to pay. What often confuses VA borrowers and even industry people is the difference between closing costs and concessions on a VA loan.
This is often misconstrued, misrepresented or outright mistaken, so let’s state it as plainly as possible: There is no cap on how much a seller can contribute on VA loan closing costs. But there is a cap on what’s known as concessions.
No Closing Cost Cap
There’s no set figure for your closing costs. Some industry folks will say it’s typically 3 to 5 percent of the loan amount, but it really varies based on an array of factors.
VA lenders generally charge borrowers a 1 percent origination fee, which covers a series of mortgage-related costs like origination, underwriting, processing, mandated inspections and other needs. Lenders can also charge some other fees and costs, but there’s also a laundry list of things they can’t charge if they decide to use the flat 1 percent rate. (See: The VA Limits What Borrowers Can Pay in Closing Costs.)
These costs and fees can add up. The beauty is you can ask someone else to pay them. It’s common for VA borrowers to have the seller pay most if not all of their closing costs. It’s something you have to negotiate during the purchasing process, and there’s no guarantee the seller will agree. But many of them do, especially in a buyer’s market.
As long as what you’re asking them to cover is legitimate, a VA seller can pay for any and all closing costs. That’s a tremendous benefit that saves veterans no small sum.
Cap on Concessions
Seller concessions are a different story. These are things outside the normal suite of closing costs that have value and can help a seller to close a deal. The seller may agree to pay your VA Funding Fee as a concession rather than have you add it to your loan amount. They can also cover prepaid taxes and insurance; debts that have to be paid at closing; and liens or judgments against the borrower.
Concessions can even include appliances or other items left in the home or a seller’s credit to purchase them.
The hitch with concessions is their value can’t total more than 4 percent of the home’s appraised value. On a $150,000 value, that’s $6,000, which may very well be more than enough to cover the VA Funding Fee, prepaid taxes and insurance and more.
When it comes to closing costs and concessions, your loan specialist and your real estate agent can both help you evaluate your needs and craft a strategy when it’s time to make an offer on a home.