Even though you’ve probably heard the term “no closing cost” loan, the fact is that all mortgages come with closing costs. There’s just no way around it. There are lender closing costs and non-lender closing costs needed to perform various services and retrieve documents from various third parties. A lender fee might be an underwriting or appraisal fee while a non-lender charge would be something like title insurance or attorney fees.
VA loans are popular with those who are eligible primarily because of the low cash needed to close. There is no money down required with a VA loan, which certainly helps keep cash to close to a minimum. In addition, veterans are restricted from paying certain types of fees. A veteran cannot pay for an attorney fee or escrow charge but can pay for others. What fees can the veteran pay?
Veterans can pay for an appraisal, credit report, title insurance, and related title charges, an origination fee if expressed as a percentage of the loan amount and a recording fee. In states where a survey is required, a veteran is also allowed to pay for a survey. Everything else must be paid for by others. Lenders often refer to the acronym ACTORS when quoting closing costs. Who can pay?
Sellers are often asked to pay for certain closing costs the veteran is not allowed to pay. When an agent makes an offer and the contract states VA financing will be used, the sellers need to be aware of what charges they can expect to pay. The sellers can always decline to pay for additional closing costs, but with an accepted VA offer, sellers will pay for closing costs sometimes referred to as “unallowable” fees. These fees are off-limits for buyers but still charged to provided needed services.
Sometimes buyers can increase an offer above what the sellers are asking. If a home is listed at $200,000 and closing costs to the buyer are estimated to be $3,000, an offer of $203,000 can be made with the sellers using the extra proceeds to pay for the buyer’s closing costs. With VA loans, sellers are allowed to pay for some or all of the buyer’s costs. VA loans allow the sellers to contribute up to 4.0 percent of the sales price of the home.
In this example, that would be $8,000 but closing costs on a $200,000 generally won’t be quite that high. Your loan cost estimate will have that figure. Further, with an $8,000 credit to the buyers, there may be an issue with the appraisal. If it takes an $8,000 incentive to a buyer, what’s the home really worth in an open market? The appraisal will also state whether or not sellers in a particular market help buyers out with closing costs.
When first applying for a VA loan, the buyers receive a closing cost estimate from the lender. These closing costs will be listed as a lender and non-lender charges. In addition, the cost estimate will show who will be responsible for paying them. Yet in different parts of the country what the sellers and buyers pay might be different. For example, it might be customary in one state for the sellers to pay for a title insurance policy the lender needs but in other states, it’s not customary. Further, particular real estate markets can have their own agreed upon cost sharing.
Finally, there is a way to have neither the buyer nor the seller pay for particular charges. Instead, the lender can provide a closing cost credit at the settlement table. This is where the term “no closing cost” loan comes into play. Just like buyers can pay a discount point to lower the rate on a mortgage, the lender can increase the rate and provide a credit to the buyers.
Using that same $200,000 example, paying one point, or $2,000, to lower a 30 year fixed rate by 0.25 percent. The lender can also increase the rate by the same amount and give the $2,000 credit to the buyers to be applied to their closing costs. As you can see, there are closing costs with a no-closing-cost loan, it’s just who pays for them. It can be the buyers, sellers, the lender or any combination of the three.
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