Veterans, certain veteran's relatives and some active-duty service members can get home loans with no down payment through the government's mortgage guarantee program. The VA promises to repay a portion of a loan if it goes bad, minimizing losses for the lender that fund these loans. VA loan borrowers often have credit challenges, minimal funds for closing costs and other obstacles to conventional financing. The average closing costs for a VA loan vary.
As a percentage, the average amount of closing costs charged to veterans ranges between 2 and 5 percent. Costs may exceed 5 percent, depending on the property's location and third-party fees. For example, in 2012, New York, Texas and Florida ranked among the most expensive states for average closing costs, according to a Bankrate.com survey. Variable fees that can add significantly to the closing costs include property taxes, government fees and escrow service fees.
The VA limits the closing costs charged to borrowers. Allowable costs include an origination fee of up to 1 percent, also known as a point, for the service of processing and making the loan. In addition to origination, the veteran may pay for the appraisal, credit report, prorated and escrowed taxes and insurance, title and discount points to lower his interest rate. Lenders that charge the origination point may not charge for the loan application, underwriting or processing, a pest inspection or any additional appraisals the lender orders.
VA loans have a unique cost known as a funding fee that the borrower pays at closing. The funding fee's amount depends on the borrower's down payment. Veterans using their VA loan benefits for the first time and who won't make a down payment pay 2.15 percent of the loan amount as of late 2011. Subsequent VA loan users with no down payment pay 3.3 percent as a funding fee. A down payment contribution lowers the funding fee amount. Borrowers in the National Guard and Reserves pay a slightly higher funding fee and certain borrowers receive a fee waiver. Borrowers typically finance the fee into the new loan rather than pay it out-of-pocket at closing.
VA borrowers can negotiate with the seller or lender in a refinance to reduce the closing costs they must cover at closing. For example, in a purchase transaction, the real estate contract must state that the seller will contribute a certain percentage or amount toward the buyer's closing costs. The seller can cover all reasonable and customary fees that a buyer pays, excluding non-allowable items. In addition, the seller can pay a maximum of 4 percent to pay down the buyer's debts or discount points. In a refinance, the borrower can pay a higher interest rate, also known as premium pricing, to have the lender pay his closing costs. This is often referred to as a "no-closing cost loan."
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