Loans provided through the US Department of Veterans Affairs (VA) are intended to help veterans purchase a home without the need for a down payment. Since the VA guarantees these loans, they allow veterans who might not otherwise be able to acquire a mortage to do so with minimal or no out-of-pocket costs. While VA loans have many advantages, the process for purchasing a house with one is essentially the same as with any other mortgage. This means that even with no down payment, closing costs must still be covered. Closing costs can often be a difficult concept for first-time homebuyers, so if you are purchasing a home with a VA loan, it is important to understand how they will figure into your final cost.
Understanding Closing Costs
Closing costs are part of any home purchase, not a unique feature of VA loans. Closing is the process of transferring ownership of your new house to you from its previous owners, and it can potentially be a costly affair. Closing costs may include everything from attorney fees to inspection costs to title insurance. Closing costs can vary significantly, but they tend to average around $4,000. When using a VA loan, there is an additional funding fee of 3.3% which is rolled into the closing costs if it is not paid upfront. Calculators are available which can help you to estimate your potential total closing costs and funding fee.
Paying for Closing Costs
Closing costs must always be paid before the transfer of ownership can be completed. This is sometimes an issue for new homeowners who were not expecting to put more (or any) money down out of pocket. Estimating your costs can help you to prepare, but there are other options as well. Note, however, that closing costs are not always entirely paid by the buyer. It is possible to negotiate with the sellers in order to split the closing costs.
Additionally, VA loans permit the use of closing cost credits. In essence, this allows closing costs to be rolled into the mortgage. With this approach, the cost of the sale is increased by the amount of the closing costs and the sellers then issue a credit in the correct amount. While the sellers are technically paying the closing costs in this case, it is the buyer who ultimately foots the bill through their mortgage. The VA limits seller payments for closing costs to 4% of the total value of the home, so there is a limit to the amount that a closing cost credit can cover.
What's the Right Option for You?
Ultimately, whether you choose to pay your closing costs or have them financed through a seller credit will depend largely on your financial situation. A large part of the appeal of a VA loan is being able to purchase a home with no out-of-pocket expenses at all, which can make seller credits particularly tempting. Remember, however, that in most cases sellers are under no obligation to pay for closing costs. This means that it is important to negotiate for these costs early in the process or to discuss this with your real estate agent so that they can help you to find the right sellers.
Whichever option you choose, the most important thing you can do is to have a plan in place before you reach closing. For more information, contact companies such as VA Loan Lending.