Luckily, VA non-allowable fees protect Veteran and military homebuyers from facing excessive homebuying costs. The VA limits what borrowers are allowed to pay during the closing process, ensuring VA loan borrowers can secure a home without facing an immense financial burden.
In this article, we’ll explore the VA non-allowable fees, their implications and how they impact the overall sale price of the home.
VA Loan Non-Allowable Fees
VA non-allowable fees are specific expenses borrowers are not allowed to pay. The VA determines which fees are not allowed and requires that another party covers them.
The list of VA non-allowable fees includes, but is not limited to:
- Attorney fees charged by the lender
- Real estate broker or agent commissions/fees
- Fees for additional VA appraisals requested by the lender or seller for a reconsideration of value
- Fees for a flood zone determination by the lender or appraiser
Who Pays for VA Non-Allowable Fees?
While Veterans and military homebuyers aren’t required to pay VA non-allowable fees, this doesn’t mean these fees disappear altogether. Instead, various parties involved in the homebuying process negotiate to determine who will cover the costs. These negotiations typically involve the lender, seller and real estate agents.
VA Loan Closing Costs
As VA non-allowable fees are considered part of the closing costs, there are usually other charges a borrower must be responsible for paying at that point. Lenders usually charge a 1% loan origination fee to account for various loan costs. In line with the VA’s rules, lenders may also charge reasonable amounts for itemized fees, as well as offer discount points that lower the borrower’s interest rate.
VA Loan Origination Fee
The 1% origination fee is a flat fee charged by the lender to cover the costs associated with originating, processing and underwriting the loan. Let’s take a look at an example:
Imagine a Veteran purchases a home with a loan worth $300,000. The lender charges a 1% origination fee, amounting to $3,000.
If the lender charges this 1% flat rate, they are prohibited from adding additional processing fees, such as:
- VA loan application or processing fees
- Interest rate lock-in fees
- Document preparation fees
- Lender appraisals
- Postage costs
- Escrow or notary fees
- Tax service fees
However, lenders also have the option to charge a lesser origination fee alongside the mentioned fees that would normally be considered non-allowable. Still, the total charges may not exceed 1% of the loan amount.
For example, if the lender charges a 0.5% origination fee for a $300,000 home purchase ($1,500) and also includes fees on the VA non-allowable list that amount to $1,500, the total cost to the borrower remains 1% of the loan value.
Itemized Fees and Charges
On top of the 1% origination fee, lenders can also charge borrowers reasonable fees for certain services, including:
- VA home appraisal
- Recording fees
- Credit reports
- Prepaid taxes and insurance
- Title insurance
- VA Funding Fee
However, lenders are not allowed to attach handling fees or additional costs to these third-party charges. Many of these fees have rates set and monitored by the VA.
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How to Lower VA Loan Closing Costs
Even when factoring in non-allowable fees, Veteran and military homebuyers may still be interested in lowering their closing costs.
- Ask the seller to pay: The seller can cover up to 4% of the loan amount, including the VA funding fee. The seller concession can also be used to free up cash for discount points or to cover taxes and insurance for a particular timeframe.
- Lender pays closing costs: In exchange for a higher interest rate, the lender may cover closing costs. Choosing this option means savings at closing but higher monthly payments and interest charges over the loan term.
- Make a down payment: As closing costs are based on a percentage of the loan, making a higher down payment to lower the total loan amount can also lower closing costs. It can also reduce your VA funding fee. You can estimate your monthly mortgage payment and VA funding fee using our VA loan calculator.
- Purchase discount points: Buying discount points lowers the loan’s interest rate. Be aware each point costs 1% of the total home loan, so this option requires a larger payment to be made at the beginning of the loan term and may not be viable for all borrowers.
- Check disability status: Veterans with a service-related disability may be exempt from the funding fee. Those receiving VA disability income are likely eligible.
- Find closing cost assistance programs: Contact local housing agencies for help discovering homebuying assistance programs.
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