April 15, 2009
How much does is cost to close a VA Loan?
VA home loans available to active military and veterans are possibly the best loan available today because:
The loan is a 30 year fixed interest rate. Interest rates are close to the lowest they have EVER been. VA loans are not credit score driven and have flexible underwriting guidelines to get active military and veterans qualified. VA loans do NOT have monthly mortgage insurance, unlike FHA loans, or conventional loans with less than 20% down.
range from 2-4% of the purchase price. VA allows the seller to pay up to 4% of the VA buyers closing costs so it is smart to ask the seller to “credit” you at least 3 % of the closing cost to reduce your out of pocket expenditure.
There are 3 major upfront costs required when buying a house with a VA loan; the earnest money deposit, home inspection fee and appraisal fee. When you make an offer to buy a home, it is customary to put up an earnest money deposit ranging from 1-3 % of the purchase price. This offer will show the seller you are serious. These deposit funds will be held with an escrow company after your offer is accepted. If you negotiate for the seller to pay all of your closing costs, you will get this money refunded when you close on the house.
The buyer will have to pay for a home inspection. Though optional for a VA buyer, it is highly recommended to have a home inspection. As an independent 3rd party the inspector will inspect all aspects of the house such as the structure, electrical, plumbing and more. It is so that you know you are making a sound investment. Home inspections generally run about $300. This has to be paid up front by the buyer.
There are 3 major upfront costs required when buying a house with a VA loan; the earnest money deposit, home inspection fee and appraisal fee. When you make an offer to buy a home, it is customary to put up an earnest money deposit with your offer to show the seller you are serious. This can range from 1-3% of the property purchase price. These deposit funds will be held with an escrow company after your offer is accepted. If you negotiate for the seller to pay all of your closing costs, you will get this money refunded when you close on the house.
Though it is optional to get an inspection on the house with a VA loan, it is highly recommended. The cost is on the buyer and usually run about $300 paid upfront. The inspector will check all aspects of the house, the structure, electrical, plumbing and more, so that you know you are making a sound investment.
The third cost is a VA appraisal. These run about $400 and are required by the lender. The appraiser will appraise the property and make sure the property is not less than the loan amount.
Title and Escrow Fees When you “close” your house, it will be handled by an escrow company. They will have a variety of fees to handle closing such as an escrow fee, and notary public fee. These fees will have to be included in the credit that you ask for from the seller and can amount to over $1,000 on average. When you buy a house you will be required to obtain title insurance. There are 2 title policies you must have, an owners and lenders policy. The seller will typically pay for the owners policy and the buyer will pay for the lenders policy. The cost of title insurance depends on cost of the property. For a $300,000 house the fee will probably be around $400.
The lender has fees involved with processing, underwriting, credit check and originating your loan. Remember, the buyer is not allowed to pay for the underwriting and processing fee, so these fees will have to be paid for by the seller. The origination fee can vary depending on your interest rate. Generally if you want to lock in the lowest interest rate, a lender can charge up to 1% of the loan amount as an origination fee. Additionally, if you want to buy down the interest rate below market, you can pay discount points to get an even lower than market rate
When you get a VA home loan, you will have to pay the interest on the loan from the day you close until the end of the month. So for example if you closed on your new home May 5th, you would owe interest on the loan from May 5th to May 31st. This is called pre-paid interest and is part of your closing costs. But then your first payment would not be until July 1st. So you essentially get to skip the June payment even though you move in the house May 5th. The reason for this is because mortgage payments are made in arrears or behind . You made your May payment as part of your closing costs, and you wont make your June payment until July 1st. It can be advantageous to time your closing at the end of the month, so you limit the pre-paid interest and reduce your overall closing costs.
Reserves Held by the Lender When you obtain a VA home loan the lender will collect a reserve of property taxes and homeowners insurance. Be prepared to pay as much as 9 months of property taxes paid up front at closing because the VA lender sometimes asks for this much in advance. If your property taxes are $250/mo, this means the lender could potentially take a reserve of $2,750. In addition, the lender will take a few months of your homeowners insurance up front in advance. It is very important for you to plan for this cost at closing or arrange for the seller to credit you this cost. Property tax reserves required by the VA lender are one of the largest costs related to closing. But remember, this is really not a loan cost. These are property taxes that you will have to pay anyway as part of ownership; you are just paying them in advance. If you sell or refinance, you will get a refund of any remaining property taxes or home owners insurance held in reserve by the lender.
Reserves Held by the Lender Another aspect of a VA home loan is that the lender will collect a reserve of property taxes and homeowners insurance. The lender can require up to 9 months of property taxes paid up front at closing. This can be a large expense. If your property taxes are $400/mo, this means the lender could potentially take a reserve of $3,600. Also, the lender will take a few months of your homeowners insurance up front in advance. Be aware of this cost at closing or arrange for the seller to credit you this cost. Property tax reserves are required by the VA lender and one of the largest costs related to closing. Be sure to prepare for them if this is not fully explained up front by the lender. Remember, this is really not a loan cost as these property taxes are what you will have to pay anyway as part of ownership; you are just paying them in advance. If you sell or refinance, you will get a refund of any remaining property taxes or home owners insurance held in reserve by the lender.
A requirement from the VA lender is that you to pay an entire 12 months of homeowners insurance policy in advance. All lenders require that you keep a homeowners policy on a property if there is a mortgage on it. This will insure against fire and other disasters that could damage your house. Paying 12 months in homeowners insurance up front can total anywhere from $400 to $1,000 or more. Call your insurance agent for a quote as the cost will depend on where your property is located and the purchase price.
These are the major closing costs associated with buying a home with a VA loan. As mentioned, total closing costs can range from 2-4% of the property purchase price which can be a fairly large number.
In summary, these are the major closing costs associated with buying a home with a VA loan. As mentioned, total closing costs can range from 2-4% of the property purchase price. That can be a fairly large number. So it is very important to either plan to have money set aside for these costs or work with the real estate agent representing you to negotiate with the seller to pay for your closing costs.
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