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, lender origination fees
Ongoing: mortgage payments, property tax and insurance, heat and utilities, maintenance, 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 to consider:
Often called a “good-faith deposit,” earnest money protects the seller in case you back out without reason. Essentially, earnest money is a security deposit to show home sellers that you are serious about buying their home.
The exact figure depends on where you live, but the typical earnest money deposit is around 1 to 3 percent of the purchase price.
Earnest money isn’t typically a large concern in the homebuying process. If all goes smoothly, you get your earnest money back or apply it to the down payment or other closing costs. And, if the home fails the inspection, VA appraisal or any other contingencies you list in the contract, you can typically get that earnest money back.
Fortunately for most VA borrowers, no down payment is required, but we’re still adding this to the list as a consideration. $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 downpayment if they wish. If you put down just 5%, the VA Funding Fee amount shrinks.
An essential part of the homebuying journey for VA borrowers is the appraisal. 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. In any case, we strongly encourage all borrowers to order a home inspection.
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.
Lender's title insurance does not protect you or safeguard your financial interests when it comes to title-related issues. Therefore, 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 2.3% 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 3.6%. 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 it may make sense if you plan to be in a home long-term. Talk with your loan officer to help determine a break-even point and if the upfront cost actually benefits your financial situation.
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.
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.
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.
To assure yourself of the accuracy of the estimated fee, discuss this matter with your lender and check with the local taxing authority.
Utilities are another cost of homeownership that can sneak up on borrowers. The amount of your bill will vary, depending upon the climate, how well the house is insulated and how often you use them.
In figuring whether you can afford to pay the heating and utility bill on the home, 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 from time to time; 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.
Being a homeowner comes with a lot of fees. If you are unsure that you can handle the costs involved, you should postpone buying a home until you are sure you can carry the total monthly cost or buy a less expensive home that you can afford. A lender can help you assess what may make the most sense given your specific financial situation.