Most know that VA loans are great for buying a home with no down payment and has flexible guidelines. Plus many realize that VA eligible buyers can finance closing costs. Although, this is not automatic and is often misunderstood. Usually, including these costs is accomplished through VA seller paid closing costs and VA loan seller concession rules. Not only buyers need to understand this. Also sellers, Realtors, and builders need to know these amazing VA rules. In this article, we fully explain how traditional closing costs, the VA funding fee, and other items may be covered by the seller or even the lender. Actually, other items may include the seller paying buyer’s debt or many other cool strategies for buying a home.
What Are VA Closing Costs?
First of all, VA loans are mostly like any other mortgage loan. On a purchase, there are traditional closing costs. These include an appraisal, title company or attorney charges, title insurance, recording fees, and more. Additionally, there are pre-paid items which include first year of insurance premium(s), tax and insurance escrow set up, and interim interest. But, there is a VA specific fee called the VA funding fee or other potential required inspections.
What is a VA Funding Fee?
In order to use a VA loan, borrowers are charged a VA funding fee which ranges from .5% – 3.6% of the loan amount. Ultimately, the amount depends on the following:
- First time or subsequent use (First time use is cheaper)
- Type of transaction (VA streamline refinance is the cheapest)
- Down payment percentage on a purchase
Fortunately, the VA funding fee is allowed to be financed on top of the loan and the appraised value. Since we are talking about VA seller paid closing costs, the seller may pay a portion or all of this fee. In addition, the fee may be waived completely if the borrower is a disabled Veteran or purple heart recipient!
Other Potential VA Loan Closing Costs
Although these are not charged by the VA, certain scenarios or properties require particular inspections. Even though these may apply to any loans, here are examples of potential inspections and costs:
Who Pays for Closing Costs?
Everything we have mentioned are the buyer’s closing costs. So even though a VA loan finances up to 100% of the purchase price, the buyer’s closing costs are not included…YET. This is where many first time buyers using a VA loan get confused and believe one of two misconceptions. First, there is the misconception that there are no closing costs on a VA loan. Next, some buyers using a VA loan believe that all closing costs are automatically rolled into the VA loan. Thankfully, by reading this far you know this is not the case.
How Can a Veteran Finance Closing Costs?
But, there are ways for a buyer to cover their closing costs other than bringing funds to closing. Primarily, this is accomplished through VA seller paid closing costs. In order for costs to be covered by the seller, a specific amount must be listed in the purchase contract. For instance, the contract may state, “seller agrees to pay up to $4,000 of the buyer’s closing costs”.
Another strategy includes a lender credit. Although a lender credit is not always available, it could be used to cover a portion or all of a borrower’s closing costs. A lender credit is accomplished by an increase in the interest rate. Basically, a higher rate pays the lender more. Thus, this additional amount may be passed on to the borrower in the form of a lender credit. Wait, why would I pay a higher rate? Actually, this may make sense and it comes down to which is more important: Lower rate and payment versus a little more rate and payment to cover closing costs.
VA Seller Paid Closing Costs Limits
Other mortgage loan types have a specific limit on how much the seller may pay. For instance, USDA and FHA loans allow the seller to pay up to 6% of the purchase price in costs for the buyer. Conventional loans allow from 3 – 9% of the price, depending on the down payment level. Yet, VA loans allow the seller to pay all of the borrower’s closing costs that are customary for the area. This includes up to a 1% origination fee. Remember that earlier we explained how VA divides closing costs and pre-paids. Thus, insurance, escrow set up, and interim interest are not included in this portion. Don’t worry, it gets better!
So, the seller may pay all of the buyer’s closing costs. After that, the seller may pay up to 4% of the purchase price in sales concessions. Now, let’s learn how beautiful VA sales concessions can be!
VA Loan Seller Concession Limit
Luckily, VA loan seller concessions can cover about anything else above closing costs. Now, the seller can cover those pre-paids that we mentioned for potentially a true no cash to close purchase. But, there is more! VA loan seller concession rules allow for the seller to pay the following for a buyer.
- Pay off buyer debt such as credit card or loans
- Buy out a current lease
- Pay off a buyer collection or judgment
- Purchase a lawn mower or golf cart
Again, the VA seller concession rules allow for about anything. Even sending the Veteran on a cruise is allowed. If there are extra items being paid by the seller, the description and the amount paid must be listed on the closing disclosure. Then, the title company or settlement agent will disburse these funds accordingly.
Just remember, all of these seller paid closing costs and/or concessions must be included in the sales price. Which means that the property must appraise for this higher sales price. If the VA appraised value is short of the sales price, either the price is lowered, sales concessions are lowered, buyer brings funds to closing, or all of the above. Of course, the buyer or seller could cancel the contract as well. Keep in mind, the VA funding fee may still be financed into the loan and this part of the loan may exceed the appraised value.
How Seller Paid Costs Work
Hopefully, seller paid costs and concessions for the buyer now makes more sense. But, let’s show a couple examples just to make sure you have it. Below, see how a contract with and without seller paid costs or concessions affects the buyer’s bottom line. For the examples, assume the closing costs are $4,000 and pre-paids are $2,000. Also, assume that the Veteran has sufficient entitlement for no down payment. Entitlement is found on the VA Certificate of Eligibility.
Contract Without VA Seller Paid Costs
Purchase price is $300,000 and the seller is not paying anything for the buyer. Therefore, the VA loan will finance $300,000 plus the VA funding fee on top of the base loan. In the end, the buyer would bring $6,000 to cover closing costs and pre-paids.
Contract With $6000 VA Seller Paid Costs and Concessions
Purchase price is $306,000 and the contract states the seller will pay up to $6,000 in closing costs and concessions for the buyer. Thus, the VA loan will finance $306,000 plus the VA funding fee on top of the base loan. In this example, the buyer would not bring any funds to closing. Because the seller covered all of the costs.
Contract With $10,000 VA Seller Paid Costs and Concessions
Purchase price is $310,000 and the contract states the seller will pay up to $10,000 in VA seller paid closing costs and VA seller paid concession for the buyer. So, the VA loan will finance $310,000 plus the VA funding fee on top of the base loan. Since the costs are only $6,000, there is an additional $4,000 remaining that can pay a buyer’s credit card or loan, buyout an existing lease, buy a lawn mower, or more.
Hopefully, this provides a much better understanding in how to cover closing costs while using a VA loan. So, VA loan seller paid costs / VA loan seller concessions abundantly helps a buyer that does not have funds for closing costs. Furthermore, this could be used as a strategy by a buyer who can bring the funds but prefers to finance the costs at a low rate and payment.
One last tip is that these rules apply up to any loan amount. That means a VA eligible buyer with full entitlement could buy a million dollar home with no down payment and use the VA seller paid closing cost and VA loan seller concession strategies! That is something that cannot be beat!