There are many benefits to a VA home loan: it doesn’t require a down payment and mortgage insurance like other types of loans. VA home loan interest rates are lower than conventional loans. However, VA borrowers are responsible for paying a VA origination fee and a VA funding fee. Both of these fees, and how they are calculated, are unique to VA loans.
Origination fees for VA loans can be a little confusing. Lenders may select one of two options: a 1 percent origination fee or itemized “reasonable and customary” fees, which also may not exceed 1 percent of the loan amount. It may not be clear which option your lender is choosing. A good lender will tell you when asked.
Whether your lender chooses to charge you a flat 1 percent origination fee or charge you the reasonable and customary amounts, there are some fees lenders can never ask VA borrowers to pay.
It is costly for lenders to make home loans. Lenders must pay the salaries of loan officers who guide borrowers though the process, and underwriters who analyze each borrower’s credit worthiness. Lenders also have to cover the expense of running a business. Business expenses for lenders include administrative costs such as access to credit reports, in addition to typical operating costs such as office space, utilities and computers. The origination fees help cover these expenses and include a bit extra to allow for a profit. With a conventional, non-VA loan, it is common for a borrower to pay 2 to 5 percent of the loan amount in closing costs. In comparison, VA origination fees are a bargain.
The VA regulates the amount origination fees lenders can charge you. As mentioned, the VA gives lenders two options for fees:
Fees VA Lenders Can Charge
A flat feeor
- 1 percent of the loan amount
‘Reasonable and Customary Fees’*
- Application and Processing Fees
- Document Preparation Fee
- Loan Closing or Settlement Fee
- Notary Fees
- Interest Rate Lock-In Fee
- Tax Service Fee
- Delivery/Wire Fees
- Commitment or Marketing Fees
- Trustee’s Fees or Charges
* More detail in the “Reasonable & Customary VA Loan Fees” section below.
If the lender takes the flat 1 percent route, the fee is simple to understand. For example, if the loan is $200,000, the borrower must pay the lender $2,000 at closing. Unlike closing costs for some traditional loans, an origination fee cannot be rolled into the balance of the loan. The one exception to this rule is when refinancing a VA home loan.
Reasonable & Customary VA Loan Fees
The lender can ask a borrower to pay several fees associated with the loan processing. The Real Estate Settlement Procedures Act (RESPA ) requires lenders to submit a Good Faith Estimate (GFE) to allow borrowers to prepare for upfront costs, shop around for settlement service providers, and to mitigate incidences of lender abuse.
If a veteran prefers to take advantage of an interest rate lower than the market rate, the lender can require the borrower to pay up to two discount points at closing. Each point is typically 1 percent of the loan, but it is important to understand that discount points are optional, and the cost of points is negotiable. When considering the expense of points, compare the cost to the amount that would be paid with a higher interest rate multiplied by the number of years you plan to own the home.
Other fees may also be negotiable. Also, the seller may offer to pay a portion of or all closing costs.
Allowed VA Loan Fees
If the lender does not take the 1 percent path, then its fees must fall under the scope of reasonable and customary fee amounts. If the fees seem suspicious to you, you are free to ask the lender to give you a copy of the invoice to verify the questionable charges.
Inspections and reports document the condition of the property, and of your credit worthiness. These include the following four reports.
Appraisal Up to allowable maximum appraisal fee schedule for that state. Currently, the appraisal rate is between $400-500 for a single-family residence. The lender will request the appraisal from the VA website; the VA will then select an approved provider. Note: This fee is non-refundable, even if the loan fails to close. Also, a lender cannot charge the veteran if the appraisal value is within the Notice of Value (before expiration).
Compliance inspectionA Compliance Inspection that ensures a property is in compliance with building codes and zoning recommendations must be conducted by a VA-approved service provider.
Credit ReportThe veteran is required to pay for the credit report pulled by the lender, as charged by a credit-reporting agency. This cost should not exceed $50.
Fraud Protection ReportMust be considered reasonably priced.
Prepaid items include charges borrowers must pay in advance, including taxes and insurance costs to ensure the integrity of the collateral for the loan, namely the house. Prepaid items include the following 12 items.
Flood InsuranceLenders require homes to be insured against flooding, if the home is within a Special Flood Hazard Area (SFHA) as identified by the Federal Emergency Management Agency. This determination is made with a flood zone determination (see below). Flood insurance is not included in a standard homeowner’s insurance policy. Veteran-borrowers are responsible for paying the first year’s premium at loan closing. Typically ranges between $300 to $1,000 depending on value of home.
Homeowners InsuranceStandard fire insurance that protects a home from incidents such as fire, fallen trees, weather damage (in some areas), and so on. A full year’s premium is required at closing, and is based on the value of the home being insured — usually between $300 and $1,000. As mentioned above, homeowner insurance does not cover flood damage.
Escrow Deposit/Tax and Insurance Reserves A deposit is required to establish a reserve fund to cover the costs of taxes and insurance. This amount varies based on the taxes and insurance on the home; when taxes are collected in the property’s jurisdiction; and the time of year the loan closes. You may request an estimate from the lender in advance of closing the loan.
Hazard InsuranceIf not paid directly by borrower outside closing, a veteran can choose to pay the required premium. May include flood insurance if the home is determined to be in a flood zone on the Flood Zone Determination Report, or earthquake insurance.
Survey & Plot Plan If a veteran or a lender require a survey, a survey fee is allowable. A survey for a condominium property must be pre-approved by the VA.
Flood Zone DeterminationA veteran can pay the actual charge amount if a property is determined to be in a special flood hazard area. This determination cannot be made by the lender or appraiser and must be guaranteed for accuracy.
Title Exam and InsuranceIncludes title policy, title exam, title search, title endorsement and any fees required to prepare title work.
VA Funding FeeUnless exempt from the fee (10 percent minimum disability from the VA), each veteran is required to pay a funding fee to the VA. This fee ranges from 1.5 to 3.3 percent of the loan, and may be rolled into the balance of the loan, or paid in cash upfront.
Environmental Protection Lien EndorsementA lender may add this endorsement, which ensures that there are no environmental protection liens associated with the property on the public record. The associated costs can be charged to the veteran.
Discount PointsIn exchange for a lower interest rate, the lender may impose a fee of two discount points, or 2 percent of the home loan.
Express Mail FeesOnly for cash-out refinances and IRRRL’s. Actual cost should be reasonable. If amount exceeds $50, the veteran may request the invoice.
1 percent Origination FeeThis is a one-time flat fee intended to cover all closing cost fees. If fees are itemized the total cannot to exceed 1 percent of the total home loan amount.
Review document 38 CFR 36.4312 to see a list of other fees and charges a veteran can be asked to pay. The list includes the following four items.
Recording Fees, Taxes & Stamps This includes records of your deed and other county records. Costs should not exceed $250, and are set by the county or jurisdiction where the home is located.
Closing Protection Letter Sometimes listed as CPL, the fee should not exceed $35, but may be higher in some states.
MERS Fee The Mortgage Electronic Registration System is a one-time fee toward the costs of electronic tracking of the loan and servicing rights.
Well & Septic Inspection Fees Not to exceed market service rates.
Borrowers May Not Pay the Following Fees in VA Loans
If a lender charges a borrower the 1 percent origination fee, the veteran is not responsible to pay any of the itemized fees or charges. That’s because the flat rate fee was established to cover all of costs and services needed to complete a loan’s processing. Veterans cannot be charged directly for certain fees, but a lender who levies the 1 percent origination fee is free to pay any third-party for services — as long as they are still compliant with RESPA regulations.
Veterans may ask the seller to contribute to the closing fees. This approach, known as “seller concessions,” may not exceed 4 percent of the sales price of the home. For example, if a home is selling for $300,000 then the seller may offer to pay up to $12,000 in closing fees. However, a seller does not have to agree to the concessions. Any costs exceeding 1 percent of the loan are left on the lender’s shoulders.
There are several fees lenders may not charge a borrower if the lender is charging the 1 percent fee. For example, the lender may not charge attorney’s fees to the borrower, but lenders can retain an attorney for title examination and insurance services paid for with funds derived from the flat rate.
“Non-Allowable” Fees When Lenders Charge 1% Origination
- Lender’s inspection
- Settlement fee
- Document preparation fee
- Underwriting fee
- Processing fee
- Application fee
- Pest inspection fee
- Attorney fees
- Assignment fee
- Copying fee
- E-mail fee
- Fax fee
- Postage fees
- Amortization schedule
- Notary fee
- Commitment fee
- Trustee fee
- Truth in lending fee
- Mortgage broker fee
- Tax service fee
In addition to either 1 percent flat rate or itemized origination fees, veterans must pay a VA Funding Fee. This fee helps offset costs of the VA loan guaranty program. The VA Funding Fee ranges from 1.5 to 3 percent of the loan. Unlike the 1 percent origination fee, however, veterans may finance the one-time funding fee by adding it into their VA home loan, or choose to pay it in cash at loan closing.
The total funding fee adjusts depending on a variety of factors, including:
- The borrower’s current military status
- Down payment ratio
- Whether or not the veteran is a first-time VA loan borrower.
- The type of loan: whether it’s a purchase or construction loan, an IRRRL (Interest Rate Reduction Refinance Loan), or a cash-out refinancing loan.
Fees for eligible Veterans –those with anything other than a dishonorable discharge — are determined by the status on their most recent discharge or separation papers. Veterans who served in the Reserves or National Guard during Peace Time only — that is without any deployments in support of a war effort — may be required to pay a higher VA funding fee. A lender will calculate the VA Funding Fee by drawing the appropriate percentage from the funding fee table and applying it to the loan amount. The exception is for IRRRLs, in which case the VA Form 26-8923 worksheet is required.
It is important to note that some veterans may be exempt from paying the VA funding fee. Veterans receiving VA compensation for service-connected disabilities; those currently on active duty; surviving spouses of veterans who died in service or from service-related disabilities; and veterans who would be entitled to receive compensation for disabilities if they did not receive retirement pay are all examples of exempt borrowers. To verify eligibility status a veteran must complete VA Form 26-8937 and submit it to the lender. The VA will then confirm eligibility status and issue a Certificate of Eligibility (COE).
Sometimes a veteran is found to be exempt from the VA funding fee after the loan closes, or the lender miscalculates the fees to the point of overpayment. In both cases, the veteran is eligible for a refund. If the fee was applied to the loan, it will return to the loan balance. If the VA funding fee was paid in cash, the lender is required to distribute a cash refund.
How do I calculate the VA Funding Fee?
The VA funding fee is calculated by weighing the veteran’s status on the Certificate of Eligibility, the loan type and the purchase price of the home, and if a veteran chooses to make a down payment of 5 or 10 percent. Disability status and whether or not you are a first-time VA loan borrower, or a subsequent VA loan holder are also considerations when calculating the Funding Fee. This fee may range from 1.5-3.3 percent of the loan. Remember: some service members may be exempt from paying the VA funding fee. To determine exemption status, complete form VA Form 26-8937.
Does the VA set VA loan rates? If not, who does?
The VA does not set VA loan rates. Instead, it is the lender who will weigh your credit risk against current market rates to set the loan amount. A benefit of a VA loan, however, is that the VA offers lenders a guaranty that protects the lender from loss if the borrower defaults on the loan. The guaranty mitigates lender risk and encourages lenders to extend a loan offer. While the VA doesn’t set the loan rates, the VA benefit also allows veteran-borrowers to take advantage of discount points up to 2 percent of the loan, in exchange for lower interest rates than those found in conventional mortgages.
Can I get an adjustable rate mortgage (ARM) VA loan?
Veteran-borrowers are free to choose a fixed-rate mortgage or an adjustable-rate mortgage (ARM). Unlike a fixed-rate mortgage where monthly payment amounts remain consistent, an ARM applies artificially low interest rates in the first year of the loan and adjusts over time. A “change date” is set at the close loan, and then occurs annually on the same date. The initial change date must occur between 12 and 18 months after closing. Typically, this means that payments will increase over time, though a VA ARM comes with a government mandated cap.
Another option, the VA Hybrid ARM, offers an initial fixed interest rate for a period of three or five years (3/1 or 5/1 VA Hybrid ARM) and then adjusts annually. You may want to consider an ARM if you don’t plan on staying in the home long, or if you are on a career track that will increase your salary over time.
Are VA loans a good deal?
By most accounts, a VA loan is in fact, a great deal. The VA makes several benefits available to veterans that aren’t offered to conventional home buyers, including the option to waive the down payment or the requirement to pay for mortgage insurance. In addition, the loan limits are quite high — up to $417,000 in most of the country — which is backed by the VA guaranty.
The VA guaranty lessens lender risk, giving lenders the incentive to offer a home loan to veterans, even for those individuals with less than stellar credit. And, although borrowers are still responsible foreclosing costs, that expense is far lower than conventional homebuyer obligations. Even better, sellers may assume the closing costs. Perhaps one of the VA home loan’s biggest benefits is that it can be restored and used again!
Who can I talk to if I think a lender is charging me fees it’s not allowed to?
If you think a lender is charging you non-allowable fees as determined by the VA, contact a VA representative or your regional VA loan center.