When you shop for a VA Loan, how close do you look at all of the VA loan closing costs involved? Do you know what to look for? Do you know that some lenders charge fees that others don’t? In some states, these additional charges can add anywhere from $2,000 to over $10,000 to your VA loan costs.
Here we’ll go over some things to consider when shopping for your next VA loan. Also, you will learn the various types of VA loan closing costs you can expect to find. Lastly, we’ll go over ways you can cut your VA closing costs in half, or in some cases completely eliminate them from your VA loan making it a true “No closing cost VA Loan“.
VA Loan Closing Costs Defined
First we need to define closing costs before diving into the details of what costs may or may not be involved with your VA loan.
“Closing cost” can be a very vague term. Some might define closing costs as the “fees” incurred as a result of closing on a real estate transaction. Others may say it is ALL expenses incurred.
What’s the difference?
Fees are costs charged by companies directly related to procuring the loan. These are charges passed on by the appraiser, title company, state or local agencies, lender, and lender’s vendors (credit, flood certificate, etc.).
Other costs involved are home owner’s insurance and property taxes. These are ongoing costs and not “technically” specific to the transaction.
Either definition is correct. You just need to be aware of which one is being used by the lenders you’re comparing costs to. One lender may be claiming closing costs to be much less than another. Using only “fees” as their model can reduce the appearance of closing costs significantly and of course, make their loan look more attractive.
VA loan closing costs simplified
Are you confused yet? let’s try to simplify VA loan closing costs here.
Below 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 will be directly associated with the loan being offered. Costs that are NOT directly associated with the actual loan (lender charges), will not change from lender to lender. If you’re only shopping lenders, these costs really should be eliminated from your mortgage shopping criteria.
If you’re trying to gather information about total VA loan closing costs, then you will want to include ALL costs and fees involved. There is basically two types of closing costs. There is Non-recurring closing costs (NRCC’s) and Recurring Closing Costs.
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.
Recurring 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. Shopping Lender Costs
Whether you receive a Loan Estimate or Closing Cost Worksheet, the main thing you want to pay attention to, other than the rate of course, is the lender charges. If a lender is offering a No Cost VA loan, 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.
Now you know more about what costs are what, do you know where to look? What differentiates one mortgage offer from another? All lenders are required to provide what is called a “Loan Estimate” at the time of application. This disclosure is very helpful in categorizing the different costs, thus making it easier to pick out lender charges.
Closing Cost Worksheet
The federal government has placed strict regulations on mortgage disclosures. Loan estimates are required to be disclosed “at application” or in other words, at the time you decided to move forward with a loan. Therefore, you may find it difficult to get a loan estimate initially.
Lenders have gotten around this by using what is called a “Closing Cost Worksheet” or something similar. This form will have all costs itemized out and often times much easier to read than the Loan Estimate. You can ask for one of these before you choose the lender. Just keep in mind, they may all look different from one another. So it will be even more important to know what each cost is.
Lender Fees – The Deal Breaker
Whether you receive a Loan Estimate or Closing Cost Worksheet, the main thing you want to pay attention to, other than the rate of course, is the lender charges. VA makes it extremely easy for veterans to do this. Lenders are only able to charge a 1% origination fee and/or any reasonable discount points. The origination fee is basically the lender’s or broker’s cost to do business. To learn more about this see “What is an Origination Fee”. The discount fee is simply a one time charge to “buy down” the interest rate.
In either case, these charges will be listed in the “Origination” section of the Loan Estimate and/or Closing Cost Worksheet. It is this section where you can determine the true difference from one lender to another. Some lenders do not charge either. This is what lenders refer to as a “No cost loan”. To learn more about this, refer to “VA Loan No Closing Costs” article.
VA Closing Cost Assistance
If you’re overwhelmed by all of the fees involved with your VA loan, don’t be. Not all is lost. There are many options veterans and service members have to get assistance with their VA loan closing costs. Check out all of your VA closing cost assistance options here.
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