Do I Need Money for a VA Loan | Expenses for VA Loans

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Do I Need Money to Get a VA Homeloan?

Five Minute Read

Written by Ed Andrews III on April 6th, 2020

How Much Money Do You Need to Get a VA Loan

Will you need to spend cash out of pocket in order to get a VA loan? The answer is absolutely yes! But let’s talk about how much money you need, and the potential to get that money back at closing.

So how much cash do you need? The short answer is $3,810. But that number can vary greatly. So let’s dive into what that amount comprises, so you can figure out what you can expect.

The misconception most of us veterans have is that because lenders don’t require a down payment on VA loan, that means we can buy a house without having any money. Well…..good luck with that. The moment you sign a contract to buy a home, you’ll likely be required to make an “earnest money” deposit.

People don’t just take their homes off the market to give us 30 or so days to secure financing to buy it, without us first having some skin in the game. “Earnest Money” is generally deposited with the title company handling the transaction. If you buy from a homebuilder, often times you’ll submit it directly to them.

But rest assured you’ll need earnest money for VA loan

If you don’t abide by the procedures and adhere to the dates outlined in the contract, or you back out of the deal outside of the allowable time; the seller can put the house back on the market and keep the earnest money. Here in the Dallas/Fort Worth area the most common amount for earnest money deposits is 1% of the purchase price.

Seeing how the median price for a home in DFW is $256,000 (as of 4/6/2020 per Zillow), that’s means earnest money for many veterans in this area is $2,560. What is the median home price where you want to buy a home? What is 1% of that amount?

Home Inspection VA Loan

Although this is optional, it’s really not. I strongly advise against buying a home without getting a home inspection. You need a trained professional to go through the house and test all systems to let you know what’s deficient about the property. Trust me....even brand new homes have deficiencies.

Expect a home inspection to cost you approximately $400. It’s worth every penny, if it saves your ass from a $200,000+ money pit. Check out my video on home inspections for more guidance on what you should expect from a home inspection for VA loan, and how you should respond to the inspector’s report.

Termite Inspection VA Loan

The VA also requires you to obtain a “Wood Destroying Insect Report”, or what’s commonly referred to as a termite inspection. Often you can get this in conjunction with your home inspection. If your home inspector doesn’t provide the service themselves, they usually partner with a pest control company that does. You can expect a termite inspection for VA loan to cost in the neighborhood of $150.

One of the primary killers of deals is the home inspection and/or wood destroying insect reports. There will generally be a provision in the contract that gives us a period of time to obtain both of these, and back out of the contract without penalty. This means we can cancel the deal and get our earnest money back. This period of time is called the “option period”, and as I’m sure you’ve already guessed there’s a fee we have to pay to have this tool. That fee is called the “option fee”.

You can expect to write a check for around $150 for the option fee. Option fees are credited towards the price of the home, but are non-refundable if you back out of the deal. If you need the seller to provide you with some unusual accommodation you may need to pay a larger option fee.

A couple quick examples would be taking possession of the property before closing (temporary lease), asking for a long contract (greater than 25-35 days), or extending the contract or option period after the initial contract has been signed. Those examples are not all-inclusive.

Appraisal VA Loan

Lastly, your lender and the VA will require the property to be appraised. This is to establish the value of the property and ensure the home is worth at least what the veteran has agreed to pay for it. Appraisal costs may vary, but expect to pay $550 for this service. Appraisals are the only fee you can put on a credit card if you’re trying to keep your cash as liquid as possible during the homebuying process. It should be noted that VA loan appraisal requirements are far more stringent compared to appraisals for conventional loans.

So let’s recap.....

$2,560 (1% earnest money on a house listed for the Dallas median home price of $256,000)

$400 (home inspection and report)

$150 (wood destroying insect report)

$150 (option fee)

$550 (appraisal fee)

$3,810 (total….or is it?)

There’s one thing we didn’t include, but first let’s talk about what you can get back. Remember the earnest money and option fee go towards the price of the home. In this example those two items are $2,710. Which means if you’re buying the house for $256,000 by the time you get to closing the amount you still owe towards the purchase of the property will be $253,290.

But VA allows for 100% financing, which means your lender is going to wire the full $256,000 to your closing. Which means there will be an overpayment equal to the amount of your earnest money and option fee. This overage can be refunded to you at the closing table. But we veterans need to understand we still need to have this money on the front end, even if we expect to get it back.

Now….what expenses did we leave out?

VA loan closing costs and settlement fees.

Make sure you check out my video “how much are VA loan closing costs”, so you know how much they are.

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About the Author:
Ed Andrews III

Ed Andrews III is a mortgage loan officer, and U.S. veteran of the Iraq & Afghanistan Wars. He is an expert on VA home loans, and dedicated to helping veterans achieve home-ownership.