A VA loan is a mortgage loan that is guaranteed by the United States Department of Veterans Affairs (VA) and is designed to help veterans, active-duty service members, and eligible surviving spouses become homeowners. VA loans are attractive to many borrowers because they often offer more favorable terms than conventional mortgages, including lower interest rates, no down payment, and more flexible credit requirements. However, like any loan, there are costs associated with using a VA loan. In this article, we will discuss the various costs of using a VA loan.

One of the most well-known characteristics of a VA loan is that it does not require a down payment. However, there are still upfront costs associated with purchasing a home. Utilizing a VA loan keeps these requirements manageable. There are limitations as to what and how much a buyer can pay. These limits protect the buyer (and lender) and help to keep closing costs down. Here is a breakdown of the buyer, seller, and lender financial responsibilities for parties using a VA loan.

Buyer Financial Responsibility

These are the costs a buyer incurs. Most of these fees are paid at closing.

  • A buyer pays for the appraisal (this is ordered by your lender).
  • A buyer can ask for up to 4% in seller concessions (this does not include repairs or physical requests).
  • A buyer pays their own closing costs. Typical closing costs included, but are not limited to: Homeowners insurance, title fees, title insurance, prepaid property taxes, HOA dues, VA funding fee, and credit report fees.
  • A buyer pays the VA funding fee. Check out more about it HERE.

Seller and Lender Financial Responsibility

When using a VA loan, a buyer is NOT responsible for the below costs and fees.

  • A buyer typically cannot pay for a termite inspection.
  • A buyer cannot pay for attorney fees.
  • A buyer cannot pay for real estate agent fees.
  • A buyer cannot pay for more than 1% origination fee ( Loan application fee that a lender charges).
  • A buyer does not have to put a down payment on a home (optional but not required).

Some of the common expenses in using a VA Loan: Explained

Funding Fee

One of the most significant costs associated with using a VA loan is the funding fee. The funding fee is a one-time fee that is typically added to the total amount of the loan. The amount of the funding fee can vary depending on the borrower’s military status, down payment amount, and whether they have used a VA loan in the past. For example, as of 2021, a first-time VA borrower with no down payment would pay a funding fee of 2.3% of the loan amount, while a subsequent VA borrower with no down payment would pay a funding fee of 3.6%. Borrowers with a service-connected disability are exempt from paying the funding fee.

Read our article on the new VA funding fees here.

Closing Costs

Like any other mortgage loan, VA loans also come with closing costs. Closing costs can vary depending on the lender, location of the property, and other factors. Some common closing costs associated with VA loans include appraisal fees, title insurance, loan origination fees, and recording fees. In some cases, the seller may be willing to pay some or all of the closing costs, but this is not guaranteed.

Prepaid Expenses

Another cost associated with using a VA loan is prepaid expenses. Prepaid expenses are costs that are paid upfront to cover certain expenses that will be due in the future, such as property taxes, homeowners insurance, and mortgage interest. The amount of prepaid expenses will depend on the timing of the loan closing and the due date of these expenses. These costs can vary depending on the location of the property and other factors.

Interest Rates

While VA loans generally offer more favorable interest rates than conventional mortgages, the interest rate on a VA loan can still be a significant cost. The interest rate will depend on several factors, including the borrower’s credit score, the loan amount, and the loan term. It’s important to shop around and compare interest rates from different lenders to ensure that you’re getting the best possible rate.

In conclusion, while VA loans offer many benefits to eligible borrowers, there are still costs associated with using a VA loan. The funding fee, closing costs, prepaid expenses, and interest rates are all factors that can affect the overall cost of the loan. It’s essential to work with a reputable lender and to do your research to understand all of the costs associated with using a VA loan.

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