One of the most common errors homebuyers make is thinking the down payment and monthly mortgage payments are the only costs of buying a home. In reality, these are a small part of the overall home purchase and continued upkeep.
Familiarizing yourself with all upfront and ongoing costs associated with purchasing a home with a VA loan is a great way to prevent sticker shock, so let’s break down everything you can expect:
Upfront: Earnest money deposits, down payment, appraisal fee, inspection fee, title insurance, recording fee, transfer taxes, VA funding fee, discount points and lender origination fees.
Ongoing: Mortgage payments, property tax and insurance, heat and utilities, maintenance and HOA dues.
As with most expense calculations, it depends on the type of mortgage, the size of the loan, where you are purchasing a home and more. With that in mind, here are ten upfront costs with a VA loan to consider:
Often called a “good-faith deposit,” earnest money protects the seller in case you back out without reason. It acts as a security deposit to show home sellers that you are serious about buying their home. The exact figure depends on where you live but is around 1 to 3 percent of the purchase price.
Fortunately for most VA borrowers, no down payment is required. $0 down is a massive benefit for Veteran homebuyers, as FHA and conventional loans typically require a down payment anywhere from 3.5% to 20% of the home price. VA borrowers, however, can make a down payment if they wish. If you put down just 5%, the VA Funding Fee amount shrinks.
The VA appraisal is completed in two steps and assesses both the fair market value and the health and safety standards of the home. The appraisal cost must be paid upfront and can vary depending on the state you live in and the type of property you are interested in purchasing. However, the cost of a VA appraisal typically ranges from $400 to $800.
The VA doesn't require a home inspection, but most lenders do. Inspections look for defects in the home that an appraisal typically wouldn’t cover. Appraisals are there to establish the home’s fair market price, while inspections can uncover major red flags in the property. Home inspections are not the same as appraisals, but the cost is similar. It varies by location but typically costs around $300 to $500.
Lenders typically require title insurance to protect their financial interest in the property. While buyers are responsible for this cost, you can negotiate this with the seller into your overall closing costs. Buyers often pay a one-time fee at closing for the owner’s title insurance, protecting you and safeguarding your financial interest. The prices for title insurance can vary depending on the policy, but expect around $1000 for the policy.
The recording fee is charged for recording your deed on county records—the typical fee averages from $20 to $75.
A transfer tax is a state or local tax on any change in ownership of property. State laws usually describe transfer tax as a set rate, but some states have no transfer tax at all. 13 states are exempt from paying the transfer tax: Alaska, Idaho, Indiana, Louisiana, Mississippi, Missouri, Montana, New Mexico, North Dakota, Oregon (except in Washington County), Texas, Utah, and Wyoming.
The VA Funding Fee is a required governmental fee that goes directly towards the Department of Veterans Affairs to help cover any losses and keep the guaranty program running. You can expect the VA funding fee to be 2.15% of the total amount borrowed for first-time homebuyers. If you’ve used your VA home loan benefit in the past, the fee increases to 3.3%. Some borrowers are exempt from the VA funding fee, so be sure to check if you qualify.
Discount points aren’t required, but good to mention. Many lenders allow you to purchase discount points to buy down your rate. Essentially an upfront payment for a lower interest rate. Discount points aren’t for everyone but may make sense if you plan to be in a home long-term.
The VA allows lenders to charge a 1 percent origination fee, which many do. Origination fees typically go towards the administrative side of funding a loan, including processing the application, credit checks, underwriting and funding.
Once you close on your home, it’s now time to prepare yourself for any ongoing costs associated with homeownership. Here are some common VA ongoing costs with homeownership:
Once you close on your VA loan, you will be required to make monthly payments to cover interest and principal on the mortgage. Your mortgage payment is typically the most significant monthly expense after closing day. A VA mortgage calculator can help manage your monthly mortgage payments.
Property tax and insurance will also be an ongoing cost. These often get lumped into the monthly mortgage payment through an escrow account. Keep in mind both insurance rates and property taxes may change over time, causing an increase in your monthly payment. Make sure to discuss these matters with your lender.
Utilities are another cost of homeownership that can sneak up on borrowers. The amount of your bill will fluctuate, but be sure to make an adequate allowance for these items. Your lender will help you estimate these costs, and it might also be a good idea to check with other homeowners with similar houses in the area.
Your house will wear out as it gets older. To keep it in good shape, you will have to pay for the cost of maintenance and repairs. Your heating and the electric system will need repairs occasionally; you will have to replace equipment and so on.
If you are required to become a homeowner association (HOA) member, the dues or periodic assessments payable to the association may be a notable expense item. Typically HOA dues come up once a year but can easily range from $200 - $700 depending on neighborhood and location.
VA homeownership is a great way to invest in your future. VA loans often provide favorable terms and conditions such as competitive interest rates, no down payment requirements and more flexible credit score criteria. This accessibility can make homeownership more attainable and affordable for eligible Veterans.
Purchasing a home is a long-term investment. Historically, the value of a property typically increases over time. This allows for significant equity buildup, allowing Veterans to build wealth through their home investment.
Lastly, homeownership provides stability and security as it eliminates the uncertainties and costs associated with renting. Overall, VA homeownership presents a combination of affordability, potential appreciation and long-term stability, making it a promising investment option for eligible Veterans.