Besides the advantage of requiring no down payment for qualified VA borrowers, there’s also a distinct advantage for the borrower regarding closing costs. The veteran is limited to the types of closing costs that may be paid, helping the veteran save money at the closing table. But if there are costs associated with a VA mortgage and the veteran isn’t allowed to pay for them, who does?
Types of Closing Costs
A common way to remember which costs a veteran is allowed to pay for is to remember the acronym ACTORS. That stands for:
- A Appraisal
- C Credit Report
- T Title Insurance
- O Origination Fee
- R Recording Fee
- S Survey
These are common charges found on most every VA mortgage and while they can vary a bit by amount; these fees are the ones that can be paid for by the veteran. But what about these charges?
- Tax Service
These fees, and others, are example of charges that the veteran is not allowed to pay. Even though the VA lender requires a processing and an underwriting fee in order to approve the VA loan, the veteran may not pay for these charges and any other fee deemed “non-allowable.” So if the veteran can’t pay them, who does?
The Seller Can
Non-allowed closing costs can be paid by the seller of the property and is typically the initial method of dealing with such charges. As part of a sales contract, the buyer can say, “We’ll pay you $200,000 for this home as long as you pay for $3,000 in closing costs.”
Paying for a buyer’s closing costs is considered a seller concession, and is limited to four percent of the sales price of the home. If a home sells for $200,000, then the seller can only pay $8,000 of the buyer’s costs.
Such concessions can be used to pay for the buyer’s VA funding fee, loan costs, property taxes and insurance among others.
The Agent Might
A real estate agent representing the buyer can contribute toward closing costs in the form of a credit at the closing table. Real estate agent commissions are paid for by the seller of the property and typically represented as a percentage of the sales price.
When a real estate agent brings a buyer to a seller and there are two agents, the listing agent and the selling agent, the commission is typically split between both agents. If the sales commission is six percent, each agent gets three percent each for their services. Some states don’t allow the practice of an agent contributing toward a buyer’s closing costs so check to see if it’s okay in your area.
The Lender Can
The lender can offset part or all closing costs with a lender credit. Lenders can offer a credit to a borrower by adjusting the borrower’s interest rate. It’s like paying a point to get a lower interest rate but in reverse.
For example, a VA borrower applies for a 30 year fixed rate VA mortgage and is offered a 3.75 percent rate. The lender offers the buyer a lower rate if the buyer pays one point, or one percent of the loan amount. The choice is 3.75 with no points or 3.50 with one point.
In the other direction, the lender can offer 3.75 percent with no points and 4.00 percent with one point credit to the borrower. On a $200,000 loan, the lender can increase an interest rate by about one-quarter of one percent and the borrower gets a $2,000 credit toward closing fees.
The Borrower Can
The seller can pay, an agent can pay, the lender can pay but the borrower also has one more way to pay non-allowable closing costs. Recall that an origination fee is an allowable charge. An origination fee is represented as one percent of the loan amount.
In lieu of charging the borrower non-allowed fees, the lender can charge a one percent origination fee instead of itemized non-allowable charges for things such as attorney or underwriting charges.
Closing costs on VA loans are indeed a different breed compared to FHA or conventional loans, especially with regard to who is responsible for any particular fee. If there are any questions about who pays for what, those questions should be asked directly to your loan officer. VA costs can be confusing, there’s no need for them to be.