VA Closing Costs: Seller Paid or Buyer Paid?
Written By: David Reed
Sunday, July 21, 2019
Those who are eligible for a VA loan include not only veterans but also active duty personnel with at least 181 days of service, National Guard and Armed Forces Reserve members as well as unremarried, surviving spouses of those who died while serving or as a result of a service->
With VA loans, there is a form of mortgage insurance called the Funding Fee but itrsquo;s an initial, upfront fee that isnrsquo;t paid for out of pocket but instead rolled into the final loan amount. This fee varies but for first time buyers using a 30 year fixed rate loan, the current funding fee amount is 2.15 percent of the loan amount. This ldquo;loan guaranteerdquo; is a guarantee to the lender.
Should a VA loan go into default, the lender is compensated at 25 percent of the loss. VA loans going into default is actually rather rare compared to other loan programs and is one of the highest performing loans in the industry. This despite no initial ldquo;skin in the gamerdquo; from the home buyer.
There is no down payment but there are closing costs. There are closing costs with all home loans. Even so-called ldquo;no closing costrdquo; loans. When borrowers see the term no-closing cost, itrsquo;s important to understand whatrsquo;s being offered. For example, say someone is offered a 30 year fixed rate at 3.50 percent with no discount points. But the borrower is also offered a rate of 3.25 percent with one discount point. A discount point is expressed as a percentage of the loan amount. Conversely, the borrower can lock in a rate of 3.75 percent, or 0.25 percent more than the no-point loan, lenders can then extend a one point credit toward the borrowerrsquo;s closing costs. There are closing costs, theyrsquo;re just reflected in the higher rate.
VA guidelines however restrict the borrowers from paying certain kinds of closing costs, another benefit with the VA program. Borrowers are only allowed to pay for an appraisal, credit report, title charges, origination fees, recording and survey fees where required. The other buyer fees must be paid for by someone else. Often times itrsquo;s the sellers of the property. When an offer is made, and the sellers see the buyers are obtaining VA financing- it will state so on the offer- they know theyrsquo;ll be asked to pony up some additional funds at closing to pay for the additional fees.
But the sellers are under no obligation to do so. As an incentive to the sellers, a potential buyer might increase the offer to compensate for the additional costs. Note, these additional costs really donrsquo;t add up to much compared to the entire set of closing costs, but additional costs they are.
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