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VA home loans available to active military and veterans are possibly the best loan available today because:
1. The loan offers 100% financing, no down is payment required
2. The loan is a 30 year fixed interest rate, and interest rates are close to the lowest they have EVER been
3. VA loans are not credit score driven and have flexible underwriting guidelines to get active military and veterans qualified
4. VA loans do NOT have monthly mortgage insurance, unlike FHA loans, or conventional loans with less than 20% down
This Article will discuss all the closing costs involved with buying a house using a VA home loan.
Although VA loans offer 100% financing, there are still costs involved with buying a house with a VA loan. These costs outside of the down payment are known as “closing costs”. Closing costs on a VA loan can range from 2-4% of the purchase price. VA allows the seller to pay up to 4% of the VA buyers closing costs. Therefore it is very smart when you make an offer to buy a property to ask the seller to “credit you” for at least 3% of your closing costs. This can dramatically reduce the out-of-pocket expenses to the VA home buyer to get into a home.
There are 3 major upfront costs required when buying a house with a VA loan; the earnest money deposit, home inspection fee and appraisal fee. When you make an offer to buy a home, it is customary to put up an “earnest money deposit” with your offer to show the seller you are serious. This can range from 1-3% of the property purchase price. These deposit funds will be held with an escrow company after your offer is accepted. If you negotiate for the seller to pay all of your closing costs, you will get this money refunded when you close on the house.
Next, you will have to pay for a home inspection. It is optional for a VA buyer to have a home inspection, but highly recommended. The inspector will work for you as an independent 3rd party and inspect all aspects of the house, the structure, electrical, plumbing and more, so that you know you are making a sound investment. Home inspections generally run about $300. This has to be paid up front.
And lastly, you will have to pay of the VA appraisal. When you purchase a property the lender will require an appraisal on the property, this has to be ordered right away in the purchase of property. A VA appraisal current costs $400. So to recap, in the beginning stages of buying a house, you will have to come up with an earnest money deposit, $300 for a home inspection and $400 for an appraisal.
After the upfront costs discussed above, the rest of your closing costs will be paid when you close on the house. The rest of your closing costs can be broken into 4 categories; lender fees, title/escrow fees, and reserves and pre-paids taken by the lender. There are certain fees that the VA borrower is NOT allowed to pay. These will have to be paid by the seller. The major fees the VA borrower is NOT allowed to pay for are:
1. Lender underwriting and processing fees
2. Escrow fee, notary and doc drawing fees
Title and Escrow Fees
When you buy a house, the “closing” is handled by an escrow company. They have an escrow fee, notary public fee, and a myriad of other fees for handling the closing. These fees will not have to be paid by the VA borrower, but they will have to be included in the credit that you ask for from the seller. These fees can amount to over $1,000 on average. Additionally when you buy a house you will be required to obtain title insurance. There are 2 policies you must have, an owners and lenders policy. The seller will typically pay for the owner’s policy and the VA borrower will pay for the lenders policy. The cost of title insurance depends on cost of the property. For a $300,000 house the fee will probably be around $400.
Lender Related Fees
The lender has fees involved with processing, underwriting and originating your loan. There is generally an underwriting fee, processing fee, credit check fee and possibly an origination fee. The VA borrower is not allowed to pay for the underwriting and processing fee, so as mentioned above, these fees will have to be paid for by the seller. The origination fee can vary depending on your interest rate. Generally if you want to lock in the lowest interest rate, a lender can charge up to 1% of the loan amount as an origination fee. Additionally, if you want to “buy down” the interest rate below market, you can pay “discount points” to get an even lower than market rate.
Pre-Paid Interest on the Loan
When you obtain a VA home loan, you will have to pay the interest on the loan from the day you close until the end of the month. So for example if you closed on your new home March 15th, you would owe interest on the loan from March 15th to March 31st. This is called “pre-paid” interest and is part of your closing costs. But then your first payment would not be until May 1st. So you essentially get to skip the April payment even though you move in the house March 15th. The reason for this is because mortgage payments are made in “arrears”. You made your March payment as part of your closing costs, and you won’t make your April payment until May 1st. It can be advantageous to time your closing at the end of the month, so you limit the pre-paid interest and reduce your overall closing costs.
Reserves Held by the Lender
When you obtain a VA home loan the lender will collect a reserve of property taxes and homeowners insurance. The lender can require sometimes as much as 9 months of property taxes paid up front at closing. This can be a large expense. If your property taxes are $300/mo, this means the lender could potentially take a reserve of $2,700. In addition, the lender will take a few months of your homeowners insurance up front in advance. It is very important for you to plan for this cost at closing or arrange for the seller to credit you this cost. Property tax reserves required by the VA lender are one of the largest costs related to closing and can catch the borrower by surprise at closing if this is not fully explained up from by the lender. But remember, this is really not a loan “cost”. These are property taxes that you will have to pay anyway as part of ownership; you are just paying them in advance. If you sell or refinance, you will get a refund of any remaining property taxes or home owners insurance held in reserve by the lender.
1 Year Up Front Paid on Homeowners Insurance
The VA lender will require you to pay an entire 12 month homeowners insurance policy in advance. All lenders require that you keep a homeowners policy on a property if there is a mortgage on it to insure against fire and other disasters that could damage your house. Paying 12 months in homeowners insurance up front can total anywhere from $400 to $1,000+. Please call your insurance representative for a quote. The cost will depend on where your property is located and the purchase price.
VA Funding Fee
The VA charges a 2.15% funding fee for VA borrowers using their VA eligibility for the 1st time and 3.3% for those using it for the 2nd time or subsequent times. If you have 5% or more down payment, this funding fee is less than the above stated percentages. Also, if you have a 50% or greater VA disability rating the funding fee is completely waived. VA allows this fee to be rolled into your loan. You do NOT have to come out of pocket for this fee.
In summary, these are the major closing costs associated with buying a home with a VA loan. As mentioned, total closing costs can range from 2-4% of the property purchase price. That can be a fairly large number. So it is very important to either plan to have money set aside for these costs or work with the real estate agent representing you to negotiate with the seller to pay for your closing costs.
Gone are the days of low documentation home loans. Getting a home loan today requires a lot of documentation. And if you are prepared, it will make the process a lot smoother.
Credit Score and Credit History
The very best place to begin preparing for an FHA loan is to check your credit score. Make sure you get a “tri-merge” report that merges all your credit information from the 3 credit bureaus. You can get one at www.myfico.com or at any of the credit bureau web sites (Experian, Equifax, Trans Union). Or you can work with your loan officer to do a credit check for you. This is the best option because the loan officer will get a “mortgage oriented” credit report and the cost will be less to you.
Make sure you go through your credit report with a fine tooth comb to make sure everything on your report is accurate. For more information on credit tips visit my article at www.socalfhahomeloans.com. Generally you’ll need a 620 or above credit score to get the better FHA interest rates. Although you still can get an FHA loan with a score below 620.
FHA required Job History
Generally, FHA loan underwriters are looking for a 24 month job history to qualify. But there can be many exceptions to this. Gaps in employment are allowed if you have a good explanation (attending school, laid off, sabbatical, etc…). There also has to be an explanation if changing careers within the 24 month job history.
FHA required Income Documentation for W-2 Wage Earners
If you are a W-2 wage earner, you will want to gather your last month’s paystubs and last 2 years of W-2’s. If you receive a bonus as part of your income, the lender will require a 24 month history of that bonus in order to count that as part of your income. The lender verifies your bonus history by send a “verification of employment (VOE)” form to your employer who will fill out details of your pay on the form. Additionally, if you are paid hourly and your hours fluctuate or you receive overtime pay, the underwriter will also require a VOE and they may take an average of your monthly income over a longer period.
FHA Down Payment and Cash Reserves Documentation
FHA loans require that you document the source of your down payment, and also the cash reserves you will have after closing on the house. As a note, FHA does not require you have cash reserves after closing, but it can help as a compensating factor if you are on the borderline of qualifying. To document the down payment and cash reserves, FHA will require your last 2 months of bank statements all pages where you’ll be getting your down payment. Or if a retirement account, your last 2 mos or quarterly retirement statement all pages. FHA allows you to receive a gift for ALL of the down payment. If you are receiving a gift, you must have a gift letter (which your loan officer will supply), bank statements from the gift donor showing the source of the gift, and evidence the gift was transferred to you.
Be careful of large deposits showing on your bank statements during the prior 2 months and while applying for a FHA loan. FHA underwriters will ask you to “source” any large deposits into your bank account over the last 2 months.
Details are extremely important with all the above documentation. You have to be meticulously detailed with gathering all the documentation, making sure it’s clearly readable, and making sure not even 1 page is missing. For instance with your bank statements, you must have EVERY page of your recent bank statement, there cannot be one page missing. And the statements must have your name and account number on them. And for example if you are self-employed, you must have ALL pages and ALL schedules of your personal tax returns (and corporate if you own the company). There can’t be any missing pages.
I hope you enjoyed this article. Please contact me for further details.
Rob Chomentowski
Sr. Loan Officer
858-922-7899 (direct)
rob@affinity-financial.com
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