Marcus Marion, CMA™ This article is part of an ongoing series that addresses some of the most common questions home buyers have about the VA loan program. Today, we will answer a question relating to the closing costs borrowers typically have to pay.
Question: Can I roll my closing costs into my VA loan, and pay them off over time?
Most closing costs cannot be rolled into the loan. The one major exception is the VA loan funding fee, which all borrowers have to pay. This fee can be paid up front or financed into the loan and paid off over time. But most of the other costs have to be paid at closing.
The Terminology Being Used Here
Before we go further, we should clarify some of the terminology being used here. This will benefit those readers who are only vaguely familiar with this program.
VA loans are mortgage loans offered to eligible veterans, active-duty service members, and certain members of the National Guard and Reserves. These loans are guaranteed by the U.S. Department of Veterans Affairs and are designed to provide veterans with favorable terms, including lower interest rates and no down payment requirements. They make homeownership more accessible to those who have served in the military.
Closing costs are the various fees and expenses associated with the purchase of a home or property. These costs can include charges for services such as the home appraisal, title insurance, credit reports, and legal fees. Closing costs can vary widely depending on factors like the location and price of the property. Some are paid by the buyer, while others are paid by the seller.
“Rolling closing costs into the loan” occurs when a borrower includes the closing costs as part of the mortgage loan amount, rather than paying them up front at the time of closing. This allows home buyers to finance these expenses over the life of their mortgage, reducing the immediate out-of-pocket expenses required to purchase a home. But it can also increase the total amount of interest paid over time, since you’re paying interest on a larger amount.
Typical Closing Costs for a VA Loan
All types of mortgage loans come with closing costs. And many of these fees are the same regardless of the type of loan that’s being used.
For a VA loan, typical closing costs can include fees and charges relating to mortgage origination, loan processing, government recording and transfer procedures, and more. Here’s one way to think about it: anytime someone performs a service to support your home purchase, they will charge a fee for that service. Collectively, these various fees become your closing costs.
The amount itself can vary due to a number of factors. Generally speaking, closing costs for VA loans and other types of mortgages range from 2% to 5% of the home’s purchase price.
This program allows borrowers to finance up to 100% of the purchase price, eliminating the need for a down payment. But borrowers still incur closing costs, which can add up to many thousands of dollars. This is why a lot of borrowers wonder if they can roll their closing costs into their VA loans and pay them off over time.
VA Loan Closing Costs Cannot Be Rolled In
In a typical home-buying scenario, the closing costs associated with a VA loan cannot be financed or “rolled into” the loan. They usually have to be paid on or around the scheduled closing day, making them an upfront out-of-pocket expense.
The VA loan funding fee represents the one exception to this general rule. This fee helps to support the program while minimizing the burden on U.S. taxpayers. Most borrowers who use VA loans have to pay the funding fee. But some borrowers, including disabled veterans, are exempt from paying it.
The funding fee amount can vary. Borrowers who are new to the program and make a down payment below 5% usually have a funding fee equal to 2.15% of the loan amount. Borrowers who have used the VA loan program in the past typically have to pay 3.3% in funding fees.
As it explains on the Department of Veterans Affairs website: “You can pay the VA funding fee in either of these ways: include the funding fee in your loan and pay it off over time (called financing), or pay the full fee all at once at closing.”
Start Saving Today to Facilitate Your Purchase
To recap, most of the closing costs for a VA loan cannot be financed or rolled into the loan. The funding fee is the one major exception; it can be paid upfront or rolled into the monthly mortgage payments.
The median home price in the United States in 2023 is currently around $428,700. Closing costs for a VA loan typically range from 2% to 5% of the purchase price. This means the closing costs on a median-priced home in the United States might range from $8,574 to $21,435. That’s a significant amount of money for the average home buyer, and it has to be paid in advance.
This is why it’s so important to prepare financially. If you are planning to use a VA loan to buy a home in the near future, try to save as much money as possible to cover your closing costs and other expenses. The sooner you start saving—and the more money you can save for this purpose—the better prepared you’ll be for the home buying and closing process.
Here are some steps you can take to bolster your savings strategy:
- Create a monthly budget to track your expenses.
- Reduce unnecessary spending as much as possible and prioritize saving.
- Set up an automatic transfer from checking to savings.
- Consider downsizing or renting a more affordable place.
- Increase your income through a part-time job, freelancing, side gigs, etc.
- Save windfalls, like tax refunds or bonuses.
- Stay patient and committed to your savings goals.
The VA home loan program offers many benefits that can help clear the path to homeownership. But you will still encounter closing costs when using this program to buy a house, so it’s best to prepare early.
