Can Closing Costs Be Financed in a VA Loan? – Exploring Different Ways to Finance VA Loan Closing Costs

Introduction

A VA loan is a mortgage loan that is guaranteed by the United States Department of Veterans Affairs (VA). It is designed to help veterans and service members acquire a home with little or no money down. VA loans offer several benefits such as no private mortgage insurance requirement, no pre-payment penalty, and more lenient credit requirements.

Closing costs are fees associated with obtaining a loan, such as appraisal fees, attorney’s fees, title search fees, and recording fees. These costs must be paid at the closing of the loan, which is why they are referred to as “closing costs.” The purpose of this article is to explore if closing costs can be financed in a VA loan.

Exploring VA Loan Closing Costs & Financing Options

When taking out a VA loan, it is important to understand the various closing costs associated with the loan. The following is an overview of VA loan closing costs:

• Appraisal fee: A fee charged for an appraiser to assess the value of the property.
• Attorney’s fee: A fee charged by an attorney to review the loan documents.
• Title search fee: A fee charged to search public records to ensure there are no liens against the property.
• Recording fee: A fee charged to record the deed with the county.
• Origination fee: A fee charged by the lender for processing the loan.
• Underwriting fee: A fee charged by the lender to review the loan application.

VA borrowers are allowed to finance certain types of closing costs, but not all. It is important to understand what costs can and cannot be included in the loan. There are a few different ways to finance VA loan closing costs, including utilizing seller concessions, using a lender credit, and more.

How to Avoid Paying Out-of-Pocket for Closing Costs on VA Loans

One way to avoid paying out-of-pocket for closing costs on VA loans is to utilize seller concessions. Seller concessions allow the seller to pay for some of the buyer’s closing costs. This can be beneficial to both parties involved in the transaction, as it allows the buyer to purchase the home without having to come up with the money for closing costs. The amount of seller concessions allowed is determined by the VA and may not exceed four percent of the loan amount.

Another way to avoid paying out-of-pocket for closing costs on VA loans is to use a lender credit. A lender credit is an amount of money that the lender will give to the borrower to cover some of their closing costs. This can be a great way to avoid paying out-of-pocket for closing costs. However, it is important to note that the lender credit may be limited depending on the lender.

A Guide to Financing Closing Costs on a VA Loan

When considering financing closing costs on a VA loan, it is important to understand the maximum allowable closing costs. The VA has set limits on the amount of closing costs that can be included in the loan. Generally, the total amount of closing costs that can be included in the loan cannot exceed one percent of the loan amount. Additionally, the total amount of closing costs and prepaid items cannot exceed three percent of the loan amount.

There are certain types of closing costs that can be financed on a VA loan. These include appraisal fees, attorney’s fees, title search fees, recording fees, origination fees, and underwriting fees. It is important to note that some closing costs, such as prepaid interest and taxes, cannot be included in the loan.

Another important consideration when financing closing costs on a VA loan is the funding fee. The funding fee is a fee charged by the VA to help cover the cost of administering the loan program. The amount of the funding fee varies depending on the type of loan and the borrower’s military status. The funding fee can be included in the loan amount.

What Are the Different Ways to Finance VA Loan Closing Costs?

In addition to utilizing seller concessions and using a lender credit, there are several other ways to finance VA loan closing costs. These include gift funds, home equity loan, and cash from savings. Gift funds are funds that are given to the borrower by a family member or friend. Home equity loan is a loan taken out against the equity in the borrower’s home. Cash from savings is money taken out of the borrower’s savings account to cover closing costs.

It is important to note that when using any of these methods to finance VA loan closing costs, the borrower must still meet the VA’s requirements for loan eligibility. Additionally, the borrower must provide documentation to verify the source of the funds used to cover closing costs.

The Pros & Cons of Financing VA Loan Closing Costs

Financing VA loan closing costs can be beneficial for some borrowers, but it is important to consider the pros and cons before making a decision. The following are the pros and cons of financing VA loan closing costs:

• Pros: Financing VA loan closing costs can help borrowers save money, as they will not have to come up with the money for closing costs out-of-pocket. Additionally, financing closing costs can make it easier to qualify for a VA loan, as the borrower will not need to have as much money saved up.
• Cons: Financing VA loan closing costs can increase the amount of the loan and the total amount of interest paid over the life of the loan. Additionally, there may be restrictions on the types of closing costs that can be financed, and the borrower must meet the VA’s eligibility requirements.

Conclusion

Closing costs can be financed in a VA loan, but it is important to understand the different ways to finance VA loan closing costs and the pros and cons of doing so. Utilizing seller concessions, using a lender credit, and other methods can help borrowers avoid paying out-of-pocket for closing costs. Additionally, understanding the maximum allowable closing costs and types of closing costs that can be financed can help borrowers make an informed decision about financing VA loan closing costs.