VA Loan Closing Costs Explained

What are VA loan closing costs, and what should you expect?

My name is Evan Kaufman, your VA loan educator, and I’m here to help explain.

First, we’ll cover the general closing costs that apply to almost every home purchase. Then we’ll talk about the one major closing cost that’s unique to VA loans.

General Closing Costs

When you buy a home, the purchase price isn’t the only expense you’ll pay. In addition to the price of the home, there are closing costs associated with completing the transaction.

These typically include:

• Title and settlement fees

• Recording fees

• Taxes

• Lender fees

• Prepaid expenses

• Escrow account funding

For example, you may purchase a home for $200,000, but you’ll also have several thousand dollars in closing costs on top of that purchase price.

Title fees can range from a few hundred dollars to several thousand dollars, depending on your location and the complexity of the transaction.

There may also be state or local taxes, recording fees, and lender charges such as underwriting or processing fees. If you choose to buy down your interest rate with discount points, those costs are also included in your closing costs.

Prepaids and Escrow

Another significant portion of your closing costs comes from prepaid expenses and your escrow account.

I’ve covered both of these in separate videos, but here’s the basic idea.

Some expenses have to be paid in advance. For example, many homeowners pay the first year of homeowners insurance at closing.

If your annual insurance premium is $3,000, you’ll generally need to bring that $3,000 to closing.

You’ll also fund your escrow account, which is used to pay future property taxes and homeowners insurance on your behalf.

In many cases, your prepaids and escrow funding make up roughly half of your total closing costs.

For example, if you’re purchasing a $300,000 home and your total closing costs are $9,000, it’s entirely possible that around half of that amount consists of prepaid taxes, insurance, and escrow funding.

It’s important to remember that these aren’t simply fees that disappear. You’re prepaying future expenses, and any remaining balance in your escrow account is generally refunded to you if you refinance or sell your home.

The Main VA-Specific Closing Cost: The VA Funding Fee

Now let’s talk about the one major closing cost that’s unique to VA loans: the VA funding fee.

The VA funding fee is a one-time fee charged by the Department of Veterans Affairs to help keep the VA loan program operating.

It’s important to understand that this fee is set by the VA, not by your lender. Every lender charges the same VA funding fee based on the VA’s guidelines.

The funding fee can be:

• Paid by the buyer

• Paid by the seller

• Rolled into the loan amount

Unlike most other closing costs, this is one expense that can typically be financed into your VA loan.

Watch Out for Misleading Fee Names

One thing to be aware of is the wording used on loan estimates or closing disclosures.

The legitimate VA charge is specifically called the VA Funding Fee.

If you see charges labeled something like “VA Administration Fee” or “VA Admin Charge,” take a closer look.

Those are not VA fees. They may simply be lender fees with names that make them sound like government charges.

If you have questions about any fee on your loan estimate, ask your lender to explain exactly what it is.

Who Doesn’t Have to Pay the VA Funding Fee?

Many veterans don’t pay the VA funding fee at all.

The fee is typically waived if you:

• Receive VA disability compensation

• Qualify for certain Purple Heart exemptions

• Are an eligible surviving spouse

• Meet other specific VA exemption requirements

If you qualify for one of these exemptions, your lender should make sure the funding fee is removed from your loan.

If the funding fee does apply, the amount depends on several factors, including:

• Whether it’s your first or subsequent use of a VA loan

• Your down payment amount

• The type of VA loan you’re using

For example:

• A VA IRRRL (Interest Rate Reduction Refinance Loan) has a funding fee of just 0.5%.

• A VA purchase loan may have a funding fee ranging from 1.25% to 3.3%, depending on your circumstances.

Other Costs You May See

There are also a few costs that are common with VA loans, although they aren’t actually VA fees.

For example, many areas require a termite inspection on VA purchase transactions. Depending on the state and local rules, the buyer or seller may pay for that inspection.

Properties with private wells or other unique characteristics may also require additional inspections or testing.

These aren’t fees charged by the VA, but they are costs you may need to account for during the transaction.

Can You Buy a Home With No Money Out of Pocket?

A question I hear all the time is:

“I thought VA loans covered all the closing costs.”

Not exactly.

The only closing cost that can generally be rolled directly into the loan is the VA funding fee.

The rest of your closing costs usually need to be paid at closing—or covered another way.

One of the most common strategies is to negotiate seller concessions or a seller credit.

For example, let’s say you’re buying a $500,000 home and your closing costs total $10,000.

You might ask the seller to provide a $10,000 credit toward your closing costs, while rolling the VA funding fee into the loan.

That could allow you to purchase the home with little—or even no—money due at closing.

This is something we discuss with our clients before writing an offer, and experienced real estate agents understand how to structure these negotiations.

The Bottom Line

Most VA loan closing costs are the same costs you’d see with any mortgage, including title fees, lender fees, prepaid expenses, and escrow funding.

The one major cost unique to VA loans is the VA funding fee, although many veterans qualify to have that fee waived.

Understanding which costs are standard, which are VA-specific, and how seller concessions can help cover them makes the homebuying process much easier to navigate.

I hope this helped demystify VA loan closing costs.

My name is Evan Kaufman.

Please subscribe and like the video, and if you have any questions about using your VA loan benefit, we’d be happy to help.

Take care.