One of the most frequently asked questions I hear as a loan officer is whether it is possible to roll closing costs into a VA home loan. Given that the VA loan program offers a zero down payment option, many potential homebuyers hope to complete their purchase without needing cash at closing. In this post, I’ll break down how these costs work and what options you have.
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The only closing cost that can be included in the VA loan amount is the VA funding fee. This fee is typically over 2% for first-time use when no down payment is made; for instance, if you purchase a home for $100,000, the loan amount can be just over $102,000 to include this fee.
If your repossession was related to a financial hardship, extenuating circumstances can also reduce or eliminate this waiting period. Extenuating circumstances such as job loss or medical issues, when fully resolved, can be persuasive arguments that may allow for quicker approval timelines.
While you might wish to add other costs—like title fees, appraisal fees, and insurance—into the loan, this cannot be done. Lenders avoid allowing excessive financing that pushes the loan amount significantly over the purchase price, which could lead to financial risk for both the borrower and the lender. Rolling in too many costs could result in the loan amount climbing to 8-10% over the purchase price, which is problematic.
Although you can’t roll closing costs into a VA home loan in the traditional sense, there are several effective options to consider:
Lender Credits: Lender credits refer to a small amount of money offered by the lender to cover your closing costs. This typically involves accepting a slightly higher interest rate in exchange for these credits. In a favorable interest rate environment, this could mean getting $1,000 to $2,000 credited towards your closing costs. However, in a higher rate environment, the credits may not be sufficient to cover all costs.
Seller Concessions: Seller concessions are a popular way to reduce your cash-to-close requirements. You negotiate with the seller to cover a portion of your closing costs, which is then included in the purchase contract. If you need $5,000 in closing costs, you could increase the purchase price by that amount while asking for a credit for closing costs. Just be mindful that the home must appraise for the higher sale price.
Gift Funds: Another option is to receive gift funds from relatives or friends. The VA program has no restrictions on who can provide gift funds, making this a flexible way to cover your closing costs. With proper documentation showing the source of the funds, you can use these gifts to make your closing process more manageable.
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In summary, while you cannot roll most closing costs into your VA home loan, you do have several avenues available to help cover these expenses. Understanding how the VA funding fee works and exploring options like lender credits, seller concessions, and gifts can significantly ease your financial burden at closing.
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