A Closer Look at VA Loan Closing Costs
When you shop for a VA Loan, how close of a look do you take at all of the VA loan closing costs that are involved? Throughout this website, you will see mention of “no lender fees” or “zero origination”. Do you know there are other closing costs involved with VA loans? In some states, these additional charges can add up to well over $10,000 depending on the size of the home you’re buying or refinancing. Here we’ll go over some things to consider when shopping for your next VA loan. Also, learn the various types of VA loan closing costs you can expect to find. Lastly, we’ll go over ways you can cut your closing costs in half, or in some cases completely eliminated them from your VA loan making it a true “No closing cost VA Loan“.
Is VA a Lender?
VA is not a lender nor does it provide financing for brokers. It is a mortgage insurer, similar to FHA and USDA. In order to sustain itself, VA charges a funding fee to all veteran borrowers that do not have a service connected disability. That money is used to offset the losses incurred from other veterans that have defaulted on their VA loans.
VA Loan Costs Defined
A no cost mortgage is not a new concept. It’s been around for quite some time. It takes different forms and can have different meanings. It can range anywhere from a no lender fee loan, which is the most widely used definition to a complete No closing costs loan.
A no cost (no lender fee loan) has also been referred to as as no points loan, no fees loans (NPNF). Most generally this means No charges will be incurred by the customer from the lender for a market rate mortgage. However, there are some times in the case of refinances, where all fees are paid by the lender – TOTAL NPNF loans. It is best to analyze the cost/benefit factor before pursuing a loan that drastic though as more often than not, the rates are increased to offset the cost that is being absorbed by the lender. This of course would mean a higher payment. In the case of shorter term loans, such as VA Hybrid ARM loans, this could work to your advantage where in a 30 year fixed, it may not.
In the case of VA loans, because there is so much profit in these loans, it is easy for some banks to waive their fees and even pay other costs for you without raising the rate. The important thing that needs to be noted is ALL mortgage loans have costs (waived or not), associated with them and these costs generally fall into three categories:
Points – are the essentially pre-paid interest on a loan. They are often called discount and origination fees. Discount fees are points paid to the lender who actually funds the loan and the origination fee goes to the lender or broker who processes the loan. For example one point equals 1% of the loan amount. Therefore on a $300,000 mortgage 1 point is $3,000 and 2 points, $6,000. Simple concept. On a VA loan, VA says it’s ok for the lender to charge points equal to 1% origination plus any reasonable discount. What veterans don’t realize is they can shop for a lender that doesn’t charge this fee. By finding a VA lender that doesn’t charge these points for the same or lower rate, the veteran could end up with a lower priced house and spend thousands less out of pocket.
VA loan closing costs simplified
Here you’ll see a breakdown of closing costs associated with mortgages. When shopping for mortgages, it’s important to know how to differentiate between costs that are affected by the lender and costs that are not. Costs affected by the lender you choose will be directly associated with the loan being offered. Costs that are not directly associated with the loan (example: Home owner’s insurance) will not change from lender to lender and really should be eliminated from your mortgage shopping criteria.
Non-recurring Closing Costs (NRCCs) – these include appraisal, credit, title, escrow fees, notary, recording fees, lender “garbage fees” which can include: document preparation fees, underwriting fees, administration fees, processing fees and the like. Points may also be included in this category as well. These are fees that are associated directly with obtaining the loan and are fees you would not otherwise be paying for outside of the loan process. When points are excluded from this figure, the total may also be referred to as a borrower’s base closing costs.
2Recurring Closing Costs – Costs included in this category are your current mortgage interest, property taxes and insurance. These are fees that you would otherwise have to pay regardless of whether or not you were applying for a new loan and are not true costs of obtaining a loan but may be required to be paid at closing anyhow because of the timing of the loan closure as well as when these costs would normally need to be paid. VA requires these costs to be included, however, if it is possible, you should consider paying these costs out of pocket because to do otherwise would mean financing any pro-rated interest, property taxes and homeowners insurance over 30 or 15 years, thus increasing the interest expense to you.
What about the funding fee?
In the categories of fees listed above you will notice that the VA Funding Fee is not listed. Of course this is a cost charged to all veterans with the exception of disabled veterans. The costs listed above are referring to potential “out of pocket” charges or costs incurred at closing, not costs financed into the loan.
Look closely at the Good Faith Estimate or Estimate of Fees Worksheet
Now you know more about what costs are what, do you know where to look? What differenitates one mortgage offer from another? All lenders are required to provide what is called a “Good Faith Estimate” or GFE at the time of application. This disclosure is very helpful in categorizing the different costs, making it easier to pick out lender charges. However, the government has put such strict regulations on the way GFE’s are disclosed that lenders had to find a better way to disclose for “mortgage shoppers”. So lenders used the old Good Faith Estimate and called it an “Estimate of Fees worksheet” or something similar. Because this form is not called a “Good Faith Estimate” lenders are allowed to send this to prospective clients at any point before applying for the loan.
In either case, when shopping for a mortgage, the main thing you want to pay attention to, other than the rate and term of course, is the lender charges. If a lender is offering a No Cost VA loan, or NPNF, you will want to look to the only section where lenders can list their fees. This section will be categorized as “Origination Charges”. It doesn’t matter if the lender is charging a discount point, an origination fee, a processing fee or any other number of garbage fees, it will always show up in this section. If your lender is truly offering a no cost loan, this section will be completely void of any charges.
How Does the Lender Make Money if they Don’t Charge Fees?
This is a question that comes up quite often. For a broker it is very hard to do this as they are a middle man searching for a bank to fund the loan for them. In essence, you have another person with “skin” in the game. So by skipping the middleman, you get the loan direct and can skip the middleman costs. Most mortgage loans are sold on the secondary market and in the case of VA loans, there is a higher premium paid out for these. In most cases the premium is high enough to absorb the lower bank fees for the veteran borrower.