In a previous article, I explained what a VA loan origination fee is. Here we’re going to discuss 10 reasons you should avoid paying it “at all cost”. If you are currently working with a lender that charges one and they are unwilling to waive it, quickly find a lender that will. It's a fee that can either steal money from your bank account or equity.
10 Reasons to Avoid Paying VA Loan Origination Fees
Often times we make purchases or pay for services, blindly accepting the charge as non-negotiable. This is absolutely not the case with VA loans. Below are the 10 reasons why you should avoid paying origination fees for your VA loans.
Increases your APR
The APR basically tells home loan shoppers whether one lender is charging more or less fees than another. The APR is in essence, the rate you would actually be paying if you were to finance in the costs and pay that over the full term of the loan.
Raises your Purchase Price
You might wonder, “How can a VA loan origination fee increase my purchase price?” If you ask the seller to pay your closing cost for you, do you think they really want to do this out of their own pockets? Of course not. They are going to raise the purchase price and hope the appraisal comes in high enough to cover it.
Can jeopardize your loan approval
As you can imagine based on the previous scenario, the seller raises the purchase price to cover your extra closing costs. You wait weeks for the appraisal and to your dismay, it doesn’t come in at the purchase price. Now you find out the seller is unwilling to renegotiate the price and you don’t have the thousands of dollars to make up the difference.
This is a real scenario that can happen. The more you ask the seller to pay, the greater your chances of this happening.
Lowers your Buying Power
In certain instance, mainly with lower credit scenarios, the lender may want to see that you have money in reserves if your debt to income ratio is higher. This is to assure you will be able to make payments should something happen, such as a loss of job or another financial hardship. If you’re spending money on unnecessary closing costs such as the VA loan origination fee, leaving you no reserves, the only other possible solution would be to lower the ratios, which means purchasing a lower priced home.
Finding a lender that doesn’t charge origination fees is essential, especially in this particular scenario. Finding a lender that has Closing Cost Assistance would be a good solution as well.
Decreases your Equity
VA loan origination fees don’t only affect home buyers. It can affect home sellers as well.
Wait. How does that have anything to do with refinances?
Remember that last refinance you did? Or maybe you’ve done more than one. Every refinance you do with a lender that charges an origination fee, takes that much equity away when you sell the house. When realtors are charging anywhere between 3% and 6%, it pays to keep as much equity as you can.
Increases your Payment
This applies to both purchase and refinances. Obviously on a refinance, any fees you roll into the loan only increases the loan amount and as such increases the payment. On a purchase though, this happens when the seller pays your costs for you. Remember earlier when I mentioned the seller raising the purchase price to cover the costs? Higher purchase price equals higher loan amount. Higher loan amount equals higher payment.
Substantially increases the amount you finance
So of course, in either situation above, if you’re increasing the loan amount you end up paying more. However, it’s not just an increase by the closing costs. You’re paying interest on that money as well.
Consider a $400,000 loan at 3.5% versus a $404,000 at the same rate. Over 30 years you will have paid an additional $2,465 on that money. So instead of costing you $4,000, that origination fee would have actually costed you $6,465.
Makes Home expenses more difficult
This one is simple. Would you rather pay $4,000 in unnecessary VA origination fees or have your new home decorated or landscaped just the way you want? Maybe there’s a new mower you have your eye on? Whatever the case, you will have expenses that come with the new home and having that money when you move in will make things much, much easier.
Eliminates potential investment income
There are times when you have to dip into an investment account for one reason or another. Generally this is a last resort but it does happen once in a while. Imagine that feeling of losing all of that future income you could have made on that money? Now imagine you don’t actually have to take that money out but you do anyway.
Using investment money to pay towards something that offers no value makes zero cents. Yes, the pun was intended.
Is something you don't have to pay for
This is the most common sense reason and quite honestly it should be the only reason why you should avoid VA loan origination fees. Yet it’s one that most just don’t realize. You don’t have to pay the VA loan origination fee. There are lenders all over the country that don’t charge them.
So the question remains, if you don’t have to pay for one, why would you?