VA loan closing costs: How much are they and who pays them?

Department of Veterans Affairs (VA) loans allow eligible active-duty service members, veterans, members of the National Guard and Army Reserve, and surviving spouses the opportunity to get into a new home without making a down payment – which VA loans don’t require.

However, that doesn’t mean you’ll be able to close on your house without having any cash on hand. VA loan closing costs are an expense you should be familiar with as you navigate the home-buying process.

What are VA loan closing costs?

Anytime you use a mortgage to fund a home purchase, you’re going to run into closing costs. Essentially, closing costs are the fees you pay your lender for their assistance in creating your loan.

The term “closing costs” is a broad one used to define a wide range of fees – such as the home appraisal fee and title search fee – that you’ll encounter during the closing process. VA loans include fees specific to this type of mortgage, such as the VA funding fee (which we discuss later).

You’ll pay the closing costs when you’re signing the final paperwork for your home purchase on closing day. At the mortgage closing, you’ll have to bring the money to cover the closing costs required of the loan or roll the costs into your loan.

How much are average VA loan closing costs?

The exact amount you’ll pay in VA loan closing costs will vary based on your lender, the home you choose and the conditions of your loan. However, you should expect closing costs to be 3% – 6% of the loan amount when you buy a house.

How are VA loan closing costs different?

As with most aspects of the VA home loan process, closing costs will look different than they do with other mortgage loans. Here’s where VA closing costs deviate from the closing costs associated with conventional home loans.

Non-allowable fees

In an effort to make VA loans more affordable, the U.S. Department of Veterans Affairs limits the types of fees that lenders can charge on a VA loan. The fees that a lender can’t charge on a VA loan are known as non-allowable fees. These fees include any prepayment penalties, settlement charges and lender attorney fees.

Those who use a conventional loan to fund their purchase may be required to pay attorney fees from the lender, along with settlement charges. Financing with a VA loan allows you to avoid these costs.

However, some other fees – known as allowable fees – are required. These include the VA funding fee, loan origination fees, recording fees, credit report fees, and the cost of discount points and title insurance.

Limited origination fee

No matter the type of loan, a lender will typically charge a mortgage origination fee for underwriting and processing the loan. But, when you use a VA loan, a lender is limited in how much they can charge for an origination fee.

Mortgage origination fees typically range from 0.5% – 1% of the loan amount, but they can be higher. When using a VA loan, borrowers can’t be charged an origination fee exceeding 1% of the loan amount.

VA funding fee

The VA funding fee is a unique cost to those who take out a VA loan. This is a one-time fee that you pay to the Department of Veterans Affairs. The funding fee is used to support the continuation of the VA loan program.

The cost of the funding fee depends on whether you’re purchasing a home or refinancing, how many times you’ve used your VA loan benefit, and the size of your down payment. The funding fee represents a percentage of your loan amount, so the larger the down payment you make, the smaller your loan and funding fee will be.

An example of a VA funding fee

For example, suppose you make a down payment of less than 5% on your first home purchase using the VA loan. With that, you would have to pay a funding fee that’s 2.15% of the loan amount. But, if you made a down payment of 10% or more, your funding fee would only be 1.25%.

When the VA funding fee Isn’t required

In some special cases, you won’t have to pay the VA funding fee at all. This exemption often applies if you’re:

• Receiving or eligible to receive VA compensation for a service-related disability
• The surviving spouse of a veteran who died in service or from a service-related disability
• Eligible for compensation because of a pre-discharge claim
• An active-duty service member who’s a documented recipient of the Purple Heart

If you aren’t sure you qualify for a VA funding fee waiver, talk with your mortgage lender. They can verify this with the VA.

VA appraisal fee

With most home purchases, you’ll have to pay an appraisal fee. But, when you choose a VA loan, there’s a specialized VA appraisal fee.

The amount you’ll pay for the VA appraisal fee will vary based on the type of home you’re purchasing and the demand for homes in your area. You can typically expect to pay $525 – $1,550 for the VA appraisal fee portion of your closing costs.

Who pays closing costs on a VA loan?

When using a VA loan, the buyer, seller and lender each pay different closing costs.

The buyer

As the buyer, you’ll have to pay the VA funding fee, loan origination fee, loan discount points,  VA appraisal fee and title insurance fee, among other possible closing costs.

However, you can negotiate for seller’s concessions, which means asking the seller to cover some of your closing costs, such as property taxes, title fees or part (or possibly all) of the VA funding fee.

The seller

Generally speaking, the seller can’t pay more than 4% of the home loan amount in closing costs. However, the seller is responsible for buyer’s agent and listing agent commissions, as well as any brokerage fee and (if applicable) the VA loan termite and pest inspection.

Keep in mind, though, that the VA’s 4% cap on seller closing costs – sometimes known as seller’s concessions – doesn’t apply to all closing costs. For example, if a seller agrees to pay for the buyer’s discount points, it could push the seller’s closing costs above 4%.

The lender

Finally, the lender will cover some of the typical closing costs, such as the attorney fees.

Can closing costs be included in a VA loan?

With a VA loan, you can typically roll some of the closing costs into your loan, so you won’t have to pay them at closing. Although you’ll pay more in interest over time this way, rolling some closing costs into the mortgage can help you get into a home sooner because you won’t be required to bring as much money to the closing table.

Other closing costs might not be eligible to be rolled into the loan, but seller’s concessions and lender concessions can bring the upfront cash cost down.

Are VA loan closing costs tax-deductible?

The VA funding fee portion of your closing costs is most likely tax-deductible. However, you can only deduct the amount you paid in closing costs during a particular tax year. So, if you decide to roll your VA funding fee into your mortgage, it won’t be tax-deductible.

The bottom line

If you’re a veteran, active-duty service member, member of the National Guard or Army Reserve, or surviving spouse who meets certain eligibility criteria, you may be able to get into the home of your dreams by taking advantage of the VA loan benefit. While you should still prepare to pay certain closing costs, you’ll be able to avoid making a down payment if you so desire. For this reason and others, the VA loan is one of the top benefits of military service.

Ready to purchase a home with a VA loan? Begin the approval process with Rocket Mortgage^® today.