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VA Closing Costs Breakdown

Six Minute Read

Written by Ed Andrews III on April 16th, 2020

How much are closing costs for a VA Loan?

Simple…$16,416 (keep reading and I'll show you how to cut this in half)

Do you have to pay it all? Not necessarily. Can this amount vary? Absolutely it can. I’m going to tell you all the variables you need to be mindful of, as well who generally pays for what.

The biggest variable will be the purchase price of the home. Which for this example we are using $256,000. This is the median price of a home in the Dallas-Fort Worth, TX area at the time of this writing.

Back when I first started doing mortgages it was much harder for homebuyers to comprehend all the fees associated with their loan. But thanks to the creation of the Consumer Finance Protection Bureau (also known as the CFPB), the forms lenders are now required to use are much simpler for home-shoppers to understand.

The standard Loan Estimate (given at the beginning of the process) and Closing Disclosure (given a few days before closing) will breakdown every fee you’ll be required to pay at closing. It’s an estimate so some fees may change, but in some instances the lender will have to pay the difference.

I’m going to cover each fee in detail, so you know what to expect.

To find the itemized list of fees and costs you’ll start on page 2 of your Loan Estimate or Closing Disclosure. If you’re comparing lenders there’s only one section that matters, and that’s section “A. Origination Charges”.

These are the fees the lender charges, and thus the only fees they have control over. These fees and the interest rate are the only things you should consider when price shopping lenders. Ideally you’ll see the following three fees:

Origination Charges

1. Points (% of loan amount)

This fee is based on the interest rate you pick. The lower the rate, the higher this fee will be. Think of this as prepaid interest you pay at closing, so you can have a lower rate and pay less interest over the life of the loan.

2. Processing Fee

This is the fee the lender charges for all the ancillary tasks the lender has to complete in order to put together a loan file for you that is adequate to obtain VA financing.

3. Underwriting Fee

This is the fee the lender charges to cover the cost of having underwriters on staff to review your documentation and certify you as meeting the VA requirements for financing.

These three fees should always be looked at in aggregate. Some lenders boast about having low processing and underwriting fees (I’ve even known a few to not charge them at all). Generally they offset this cost by charging much higher points for any given interest rate.

It does you no good to save $1,500 in processing and underwriting fees, if it costs you an extra $2,000 in points from the lender that “doesn’t charge lending fees”.

Of the $16,416 quoted at the beginning of this video, it includes the following amounts for the origination charges discussed.

1. Points – $0 (we are choosing a rate that doesn’t require the payment of points)

2. Processing Fee - $750

3. Underwriting Fee - $750

These are in line with most lenders in the industry, and are approximately what you should expect to see.

The next section is “B. Services Borrower Did Not Shop For”. Most of these are by law considered “zero tolerance” fees. That means whatever is quoted to you at the onset of the process is gospel. If any of these fees increase by the time of closing, the lender is required to pay the difference.

It can not be passed on to you. While these fees may vary a little from state to state, it will be minimal. Here’s what you can expect to see in Texas.

Services You Did Not Shop For

1. Appraisal

The cost of sending a VA certified appraiser out to the property to given an opinion of the value.

2. Survey Fee

If you are refinancing and already have a survey, or buying a home and the seller has a survey; you will not be subject to this fee. Although it may still be quoted to you on your initial Loan Estimate.

3. Tax Service Fee

The cost of the lender using a tax service agency to ensure all property taxes on the home are paid.

4. Termite/Pest Inspection Fee

VA will require you to have this inspection performed on the property. You’ll be responsible for finding and paying the inspector, and thus this fee is not bound by any tolerance limits.

5. Attorney Fees

This is the cost of all legal work done to facilitate the transaction. This includes the closing document review.

6. VA Funding Fee

For veterans who are not exempt from the funding fee (primarily veterans without a service connected disability) the cost of this fee can vary. It will always be a percentage of the loan amount.

But the percentage depends on whether or not the purpose of the loan is to purchase or refinance. It will also vary depending on the size of the veterans down payment and the how many times they’ve used the program.

The funding fee can range from .5% (on an Interest Rate Reduction Refinance Loan) all the way up to 3.6% (purchase loan for a veteran that has previously used the VA home loan). These percentages can change from one year to the next. These fee does not have to be paid at closing, rather it will be added to the balance of your loan.

Of the total closing cost amount of $16,416 it includes the following amounts for the above mentioned fees.

1. Appraisal - $550 (if the property’s construction is unconventional, the square footage is significantly large, or the home is in a rural area that requires a longer commute, appraisers may charge more to go out and appraise the property)

2. Survey - $445 (if you have access to an existing survey, you won’t have to pay this fee)

3. Tax Service - $60

4. Termite/Pest Inspection - $150 (remember you are responsible for finding and inspector and

paying their fee out of pocket outside of closing)

5. Attorney Fees - $125

6. VA Funding Fee – $5,888 financed* (based on a purchase price and loan amount of $256,000 for a non-disabled veteran using the program for the first time)

Services You Did Shop For (or at least could have)

This is where you will find all of the various title charges. This are subject to 10% tolerance. Which means that the lender’s estimate of what these charges will be at the onset of the loan process, must be within 10% of what the final charges are.

If any of these fees grows by more than 10% (individually) by the time of closing, the lender will be required to pay the difference.

1. Escrow/Settlement Closing Fee

The escrow fee is what the title company charges for acting as intermediary, and holding & transferring funds throughout the transaction. The settlement fee is what they charge for facilitating the loan closing. It is not uncommon for title companies to lump these costs under one fee.

Sometimes it will be labeled escrow fee, and other times it will be labeled settlement fee. In some instances, you’ll see both fees listed individually.

2. Messenger/Courier

This is the charge you will incur to cover the cost of delivering the signed closing documents back to your lender.

3. Tax Certificate Fee

You will be provided with a document that details all individual taxing authorities for the property, and other pertinent property tax related data.

4. Title Insurance Fee

It is the title company’s responsibility to ensure that when the house is deeded over to you that it is free of any liens or encumbrances.

They will ensure you and the lender and insurance policy that will protect you in the event that they missed something. The cost of this will increase as the purchase price and loan amount increase.

5. Title Endorsement Fee

There are often riders added to a title insurance policy that make the coverage more robust. Your lender is likely to require a few specific endorsements to the title policy.

The fees you’re likely to see in this section may vary slightly from state to state, but not significantly. This is what you’re likely to see in the state of Texas.

1. Escrow/Settlement Closing Fee - $500 (may be broken up into two separate fees)

2. Messenger Courier - $60

3. Tax Certificate Fee - $65

4. Title Insurance Fee - $1,756 (commonly paid by seller, but negotiable)

5. Title Endorsement Fee - $130

Again, these fees may not be exactly what is quoted to you at the start of the loan process. However, it is prohibited by federal law for you to pay more than 10% over what was disclosed to you.

Taxes & Other Government Fees

Typically, the only thing you’ll see in section “E. Taxes and Other Government Fees” is recording fees. However, some states have tax stamps or other types of municipal fees for a real estate transaction. This is the section where those items will be outlined. In Texas what you’re likely to see is:

1. Recording Fees - $125 (the cost of recording your new mortgage and deed with the county the property is in)

In my opinion the next two sections should not be considered closing fees. I’m going to break each one down, and explain to you why I think they’re being misrepresented.

Prepaids

There are two things that you’re going to see in this section. They are homeowner’s insurance and prepaid interest. However, I don’t think it’s accurate to consider these closing fees. The cost of your homeowner’s insurance is not an expense being paid to your lender or one of the third parties involved in the transaction.

Rather it’s an expense that benefits you by ensuring that your financial interests are protected if your home is damaged by fire, inclement weather, or another named peril.

In addition, pre-paid interest is not a fee either. Mortgages are paid in arrears. What this means is that when you make your payment on the first of the month, you are paying for all of the interest that accrued the previous month. It takes an entire month for you to accrue enough interest to have a full payment due.

Therefore, because most closings don’t take place on the last day of the month you’ll usually owe a few days interest for the month you close. That money is paid at closing. But anytime you borrow money from a lending institution, you’ll have to pay interest on it. That’s not a fee associated with closing, that’s the cost of borrowing money.

The cost of your insurance policy that will begin covering your home immediately for a full year is due in full at closing. The lender cannot force you to use a specific insurer. So feel free to shop around for an insurer. A good loan officer should have various insurance contacts, and do this for you (be sure to watch my video on “How to Shop for Insurance”).

You’ll only pay what your selected insurance policy costs, but the estimate below should give you an idea of what to expect.

The prepaid interest will be based on how many days are remaining in the month on the day that you close. Obviously, there’s no way for me to know what day you might close. In this example we are basing this off a closing date in the middle of the month. Therefore, the days of interest being charged is 15 days.

1. Homeowner's Insurance - $2,200 (estimate of how much a homeowner's insurance policy would be for a home worth $256,000)

2. Pre-Paid Interest (15 days with a 3.5% interest rate) - $24.57 x 15 days = $368.60

Lastly, let’s cover section “G. Initial Escrow Payment at Closing”

Initial Escrow Payment at Closing

When you take out a VA home loan the lender will collect money from you each month to cover the cost of your homeowners insurance and property taxes. This money is added to your monthly mortgage payment and deposited into an “escrow” account that is attached to your mortgage.

Once a year the lender will go into this account and withdraw the funds necessary to pay your annual insurance premium and property tax bill. For insurance this works out pretty simple. The lender will collect three months’ worth of insurance payments at closing.

One month is to cover the month in which you will not have a payment. The other two months give the escrow account a “cushion”, just in case the insurance renewal premium is higher than the initial premium.

The taxes are a little more complicated. The amount that needs to be collected is based on how many months are left before the tax bill is due. A portion of this is paid by the seller, and a portion of it will be paid by you.

In this example we are using June 15th as our closing date, in a county that has a property tax due date of December 1st. Here’s what you’re likely to see on your Loan Estimate/Closing Disclosure.

1. Homeowner’s Insurance - $550 (three months of insurance, based on a premium of $2,200)

2. Property Taxes - $4,997/$1,944 (nine months of a property tax bill of $6,662)

So why nine months? Well, remember the taxes are due on December 1st in this example. That means the lender needs to ensure there’s enough money in the escrow account to pay that bill by the due date. Since we’re closing on June 15th, our first payment will be on August 1st.

That means you’ll make four payments (August, September, October, and November) before the taxes need to be paid. $6,662 divided by 12 months of the year is $555 per month. So if you make four payments of $555, that means you’ll deposit $2,220 into the escrow account over that four month period.

This is far less than the $6,662 that is required. Therefore the additional money is collected at closing. Now if you’re a math wiz you’ve probably already noticed that $4,997 + $2,220 = $7,217; which is more than the tax bill. The reason for this is because similar to insurance, the escrow account needs a “cushion” for the property taxes as well.

Remember that taxes change each year, and your lender is collecting money from you to pay a bill that hasn’t been produced yet. The best they can do is base it off the last tax bill. But the extra money in the escrow account helps ensure that if the bill comes in higher than the previous year, there should be enough money in the account to cover it.

It’s important to note that our closing date is June 15th. That means we are only responsible for the property taxes after that date. Therefore, the seller is required to pay five and a half months of taxes at closing. At a rate of $555 per month, that equates to $3,053. So of the $4,997 due at closing, the seller will pay $3,053. That reduces the portion you pay to $1,944

We started with a figure of $16,416, but how much of that are you likely to have to pay at closing? Let’s break it down.

$16,416

-$550 (Appraisal - This is paid out of pocket at the onset, and you can even put it on a credit card)

-$445 (Survey - Often the seller can provide the existing survey)

-$5,888 (VA Funding Fee – This can be financed by adding it to your loan)

-$500 (Escrow/Settlement Closing Fee – Commonly charged to the seller or split between both parties)

-$1,756 (Title Insurance – This is often provided at the seller’s expense, but is negotiable)

= $7,277

Although $7,277 is far less than the number we started with, it’s still a large sum of money to come up with at closing.

So the question you’re probably asking is “Can I roll this into the loan?”. Be sure to watch my video “How to Roll in Closing Costs on a VA Home Loan”.

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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.