The VA does not offer or endorse any specific closing cost assistance program but you can combine a VA home loan with a closing cost grant or other homebuyer assistance program offered by other providers, including a lender. We review several options for paying for VA closing costs below.
VA closing costs can be significant because they include the VA funding fee which ranges from 1.25% to 3.30% of your mortgage amount, depending on your military status and if you are using the VA program for the first time.
For example, active duty military personnel or veterans who buy a home with no down payment are typically required to pay a funding fee equal to 2.15% of their loan amount. In this case, the funding fee for a $250,000 mortgage is $5,375, which is a lot of money.
When you add the funding fee to lender, settlement agent, appraiser, title company and other fees, the closing costs for a VA mortgage can add up quickly. Although you are not required to make a down payment to qualify for a VA loan, the closing costs may seem like one for applicants with limited financial resources and represent a significant obstacle to buying a home.
Review VA Mortgage Guide
The good news is that there are solutions for VA applicants that lack sufficient funds to pay for closing costs. First, you can apply for a closing cost assistance program with a HUD-approved state local housing department or commission.
These programs can help you pay for all or part of your closing costs when you buy a home. Closing cost assistance programs are usually structured as grants that do not need to be repaid as long as you live in your home for a specified period of time, typically three-to-five years.
Review How Closing Cost Assistance Programs Work
You can learn more about these programs by visiting the HUD State Resources website. Simply select your state and "Learn About Home Ownership" to be directed to information about programs in your area.
If possible, you should apply for a closing cost assistance program at the same time you apply for your VA loan because the application process takes additional time. Plus, closing cost assistance funds may be limited so the earlier you apply, the better.
It is also helpful for your lender and the program provider to coordinate to make sure the grant is available when your mortgage closes. Additionally, you want to make sure your lender allows the program and that the lender is approved by the program provider.
As an additional option, an increasing number of mortgage lenders are offering their own closing costs assistance programs. We also recommend that you contact multiple lenders in the table below to understand the programs they offer as well as eligibility requirements.
We advise you to contact at least five lenders as program availability varies. Plus, shopping multiple lenders is the best way to save money on your VA loan.
There are several other points to keep in mind regarding VA mortgage closing costs. First, you can finance the VA funding fee, which means you can add it to your mortgage amount.
Although a higher loan amount increases your monthly payment, VA mortgage rates tend to be lower than standard mortgage rates, which helps to offset the cost. By financing the funding fee, you may be able to cut your out of pocket closing costs in half or more.
Another option to consider is to pay a moderately higher mortgage rate and receive a rebate from the lender to help pay for closing costs. For example, if the market mortgage rate is 3.500%, you pay 3.625% and receive money (the rebate) from the lender that is applied to your closing costs when your loan funds.
The amount of rebate you receive depends on your loan amount, mortgage rate and other factors. Please note that you do not personally receive any money from the rebate and the funds go to pay your closing costs directly.
Paying a higher mortgage rate increases your monthly payment, so you need to evaluate the trade-offs to ensure this approach makes financial sense. You do not want to pay a higher rate unless the lender rebate justifies the extra cost.
In addition to a closing cost assistance program and the other options we outlined above, there are other creative ways to pay for mortgage closing costs including a gift from a relative or friend, having the property seller pay for all or part of your costs and negotiating lower costs with the lender.
Review Ways to Lower Mortgage Closing Costs
It is important to explore all of your options to make sure that closing fees do not stand in your way of buying a home with a VA loan. Although VA closing costs can be high, with a little creativity, planning and extra effort you should be able to afford the added expense and close your mortgage.
VA Funding Fee: https://benefits.va.gov/HOMELOANS/purchaseco_loan_fee.asp