Shannon McNay — It’s Complicated
Dear It’s Complicated: I am a disabled veteran interested in buying my first home. I am considering getting a VA loan. I know the VA offers low or no down payment loans for veterans, but since I’m on a fixed income I’m worried there might be other costs involved. I’ve heard I might need $3,500 or more at closing and other costs like an inspection fee for the home I buy, but other people have said everything is free upfront and I’d only need to pay the mortgage. I’m not ready to call a lender today, but I’d like to know what to expect so I can plan ahead. Do VA home loans really have no upfront costs?
You may have to pay some costs upfront. VA loans don’t require a down payment or require you to purchase private mortgage insurance–wonderful benefits that could mean buying a home years before you could have otherwise. However, as you’ve heard, VA loans don’t eliminate all of the additional costs that can come with purchasing a home.
If you are planning to buy, it is a good idea to save up some money to help cover these upfront costs:
Home inspection and appraisal fees
Finding a home you like is only part of buying when you’re working with the VA. You’ll also have to find a home that passes the VA’s minimum property requirements. Those requirements cover things like adequate heating, updated and well-functioning electrical work, and a roof in good condition. If a home doesn’t meet those conditions, it is unlikely the VA will approve the loan.
To see if the home you choose passes muster, you’ll have to order and pay for an inspection from a VA compliance inspector. You can find your own inspector, but your realtor will also have good recommendations. On average, buyers pay $267 to $374 for a home inspection, according to Home Advisor, but that can extend to $475 or beyond if you’re considering a larger home.
You’ll also likely have to pay for an official appraisal from a VA home appraiser ordered by the lender. The appraisal essentially determines the fair market value of the home, which the lender will use to determine your home loan amount. Costs typically run around $300 to $500, according to Veterans United.
Closing costs
Closing costs are due at the time of signing and roll a whole bunch of smaller charges into one lump sum. To be prepared for the possible closing costs, here’s a list from the VA of what you might have to pay :
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Loan origination fee – Covers the lender’s administrative costs. The fee cannot exceed 1 percent of your loan costs.
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Credit report – Typically costs between $50 to $65.
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Recording fee – Charge to record your deed. Costs between $0 to $75 on average.
This is not an all-inclusive list. In addition to pay closing costs you may also have to pre-pay some taxes and hazard insurance costs, or other upfront items like homeowner’s association dues, depending on your loan agreement and your new neighborhood. If you’re in a buyer’s market, there’s always a chance you can negotiate to have the seller chip in on those costs. That’s not something you’ll be able to plan for, but it’s something to keep in mind when you get to the offer and negotiation phase.
The good news is, there are costs you’re not allowed to be charged for:
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Commissions
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Brokerage fees
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Attorney fees
Funding fee
VA loans have one unique cost: the funding fee, which is required for most loan approvals. Proceeds go to the VA to offset losses from other defaulted loans, so it’s hard to be too mad about it. Plus, the funding fee doesn’t have to be paid upfront. If the buyer chooses, the costs can be rolled into the loan.
The cost of a funding fee depends on a few factors as described by the VA:
“The funding fee is a percentage of the loan amount which varies based on the type of loan and your military category, if you are a first-time or subsequent loan user, and whether you make a down payment.” (U.S. Department of Veterans Affairs)
Regular military services members pay slightly less than reserve and National Guard members. Buyers can also pay even less if they pay a down payment on their home loan or if it is their first home purchase. For example, a regular service member with a 5 percent down payment would pay a 1.5 percent funding fee on their first home loan, or a 2.15 percent funding fee without a down payment, according to Veterans United. Overall, the funding fees do not exceed 3.3 percent of the loan.
However, since you’re a disabled veteran, you may be able to avoid this fee entirely. According to The U.S. Department of Veterans Affairs, you don’t have to pay the funding fee if you’re a “veteran receiving VA compensation for a service-connected disability,” or a “veteran who would be entitled to receive compensation for a service-connected disability if you did not receive retirement or active duty pay.”
In case you don’t fall under the above two criteria, check out this funding fee table to estimate your fee.
Getting a final estimate
Unfortunately, there’s no way to know exactly what you might pay upfront until you start working with a mortgage lender. That’s why it’s a good idea to start saving as much as you can to prepare for the costs you might incur. Even if you didn’t have to pay a dime upfront, there are quite a few unexpected expenses that tend to pop up once you’re a proud homeowner, so socking some cash away in a dedicated account is a good practice either way.
Once you get more serious about house hunting and making an offer, you can get more clarity about some anticipated fees. Due to The Real Estate Settlement Procedures Act of 1974 (RESPA), lenders are required to give you what’s called a “good faith estimate” of your closing costs. Therefore, you don’t have to worry about going down this road only to find out that you can’t afford to close the deal.
I hope this was all helpful to you. Thank you for your service and best of luck to you as you look for your first home!
