Closing costs are always part of the mortgage equation. But one of the big benefits of VA loans is that they limit what veterans and military members can pay in closing costs.
Closing costs are always part of the mortgage equation. However, one of the big benefits of VA loans is that they limit what Veterans and military members can pay in closing costs.
The VA maintains a list of fees that lenders are prohibited from charging borrowers at closing, known as “non-allowable fees.” Part of determining what expenses a VA borrower can and cannot pay will depend on how the mortgage lender structures the loan.
VA non-allowable fees refer to the costs that the Department of Veterans Affairs (VA) does not permit Veterans to pay when obtaining a VA loan. By excluding these fees, the VA aims to reduce the financial burden on Veterans when purchasing or refinancing a home.
The "1 percent rule" is a guideline established by the VA regarding the maximum amount Veterans can be charged for certain non-allowable fees. This flat 1 percent fee covers the lender’s costs associated with originating, processing and underwriting the loan. If the lender is charging the 1 percent fee, they are not allowed to tack on additional charges for things the VA considers overhead.
The purpose of the one percent rule is to protect Veterans from excessive fees and ensure the cost of obtaining a VA loan remains affordable. It sets a clear limit on the amount that lenders and service providers can charge Veterans when closing on their loan.
If your lender is charging the flat fee, there’s a host of things you cannot pay for, including:
For example, if a Veteran is obtaining a VA loan of $200,000, the maximum amount they can be charged at closing would be $2,000 (1% of $200,000). Any fees that exceed this one percent limit would need to be paid by the lender or the seller rather than the Veteran.
|VA funding fee||Application fees|
|VA appraisal||Real estate broker or agent fees|
|Second appraisal if requested by Veteran||Attorney fees|
|Credit report fees||Rate lock fees|
|Origination fee||Appraisal requested by lender or seller for reconsideration of value|
|Title examination/insurance||Appraisal requested by parties other than Veteran or lender|
|Recording fees/taxes||Escrow fees|
|Discount points||Prepayment penalty costs|
|Flood zone determination fee|
The fees VA buyers are allowed to pay can fluctuate and depend on several factors, including:
It's important to note that while the VA sets guidelines for allowable fees, lenders can still have their own fee structures within those guidelines. Borrowers should carefully review the Loan Estimate (LE) provided by the lender, which outlines the estimated fees associated with the loan. If any fees seem excessive or questionable, borrowers can seek clarification from their lender or consult with a VA representative for further guidance.
Non-allowable fees charged by the lender can be covered by either the seller, the real estate agent, or in some cases, the mortgage lender may choose to waive the fee entirely. A lender may also be required to pay a VA non-allowable fee if it wasn’t properly disclosed at the time of application or if there is an agreement between the lender and borrower.
Historically, most VA loan borrowers weren't allowed to pay for termite inspections. However, in June 2022, the VA updated its regulations to allow all borrowers to cover termite inspection reports when the inspection is required.
Lowering the amount a borrower pays in allowable fees for a VA loan is an important aspect of making homeownership more affordable. Here are some strategies to consider:
Remember, the aim should be to reduce overall costs, not just upfront charges. Sometimes paying a bit more upfront can save a lot of money over the life of the loan. Always do the math and consider your personal circumstances and long-term plans. Consulting with a VA home loan specialist can also be very beneficial.
Buying a condominium with you VA home loan benefit is a great option. However, there are additional requirements that differ from purchasing a single-family residence or a multiunit complex.
VA loans allow Veterans to have a co-borrower or co-signer on the loan. Here we break down co-borrower requirements and provide common scenarios around co-borrowing and joint VA loans.