Closing costs and other expenses are an expected part of taking out a mortgage and should be factored into your overall budget.
However, with VA loans, there are special rules on what fees the borrower can pay, and which fees are non-allowable.
What are VA Non-Allowable Fees?
VA loan non-allowable fees are costs and fees the Department of Veterans Affairs says Veteran homebuyers cannot pay. This means on closing day, VA borrowers will not encounter several fees that are typically required on conventional home loans.
VA Non-Allowable vs. Allowable Fees
|Non-Allowable Fees||Allowable Fees|
|Application fees||Appraisal fee|
|Attorney fees||Credit report fee|
|Document preparation fees||Flood determination fee|
|Escrow fees||Homeowners insurance mailing fee|
|Lender ordered appraisals||MERS tracking fee|
|Lender ordered inspections||Recording fee|
|Mortgage rate lock fees||VA funding fee*|
|Mortgage broker fees||Lender origination fee|
|Notary fees||Discount points|
|Property tax service fees||-|
|Real estate agent fees||-|
*Some borrowers are exempt from paying the VA funding fee
Lender Origination Fee
While there are quite a few fees the VA prohibits lenders from charging their borrowers, a flat 1 percent origination fee is allowed.
This 1 percent fee is common among VA lenders, although not all will charge it, and is used to cover the cost of processing, underwriting and originating your loan. If your lender is charging the flat 1 percent for origination, they cannot also charge you for non-allowable fees.
If your lender decides not to charge this 1 percent fee, they can charge you otherwise non-allowable fees, but that total still can’t exceed 1 percent of the loan amount.
Breaking Down VA Non-Allowable Fees
Now that we have a good idea of which fees are allowed and which are not, let’s break down what some of these VA non-allowable fees mean:
- Application fees: The lender cannot charge the borrower for applying for a mortgage.
- Attorney fees: These are not permitted for VA loans. However, the buyer can choose to pay for their own attorney.
- Real estate broker fees: A buyer can use a broker to find a suitable property, but cannot pay brokerage fees and commissions.
- Appraisals and inspections ordered by the lender: The borrower can pay for a VA appraisal, but can’t pay for any appraisals or inspections specifically ordered by the lender.
- Real estate agent fees: Borrowers are not permitted to pay for real estate agent commissions or fees. These fees are usually paid by the seller instead.
- Escrow fees: If an escrow account is needed during closing, you can’t pay any fees to set one up.
- Interest rate lock fees: Lenders can’t charge a fee to lock in your interest rate.
- Notary fees: Costs associated with notary services are not allowed to be passed on to VA buyers.
Breaking Down VA Allowable Fees
These are the most common fees that you might be expected to pay when using a VA home loan. However, these could differ depending on your specific lender.
- Appraisal fee: The VA appraisal helps protect Veteran buyers and ensures you’re buying a home that is up to standards.
- Credit report fee: A lender can charge a VA borrower for a copy of their credit report, but the charge can't exceed $50.
- Flood zone determination fee: This is a cost to determine whether the home is in a known flood zone.
- Homeowners insurance: The cost to insure your new home from any damages.
- Prepaid fees: Fees such as property taxes and other costs for the year can be charged to the borrower. These are typically held in an escrow account.
- Recording fees: Costs to record your mortgage with the local government are also allowed.
- Title search fees: This is to ensure no liens or judgments are recorded on the property’s title.
- VA funding fee: This fee is charged in order to keep the program running, and typically costs between 1.4% and 3.6%. However, some borrowers will be exempt from this fee altogether.
- Surveys: The borrower can pay for a survey if required by the lender. This must be approved by the VA if it’s a condominium loan.
- Discount points: VA borrowers can purchase discount points in order to lower their interest rate.
Non-Allowable Fees on VA Refinances
When it comes to refinances of VA loans, the rules are slightly different.
A mailing fee may be passed on to you if you’re refinancing. This fee covers costs like FedEx, Express Mail or similar services needed to mail out loan documents.
If you are refinacing through a VA Interest Rate Reduction Refinancing Loan (IRRRL), it’s even possible to close with no money out of pocket. This is because allowable fees can be added to the new loan or by making the new loan’s interest rate high enough for the lender to pay the costs.
The fees commonly associated with an IRRRL include:
- The origination fee (no more than 1% of the loan amount)
- Prepaid taxes
- Title insurance fees
- Flood zone determination
- VA funding fee
- Recording fees
- Discount points
- Title examination fee
- Environmental endorsements
Any other changes not listed above are usually non-allowable, similar to how regular VA loans limit fees.
Who Pays the VA Non-Allowable Fees?
VA fees deemed non-allowable are typically picked up by the seller or lender. Although it’s less common, real estate agents are able to pitch in as well.
VA Allowable Fees for Seller
While some fees may be passed on to the buyer, that doesn’t necessarily mean they are the only ones allowed to pay them. Negotiating closing costs with a seller is a fairly common practice. Any closing costs can generally be negotiated between the buyer and the seller. For example, you may be able to get the seller to agree to pay for the VA funding fee to sweeten the deal but this is not guaranteed.
There are also rules on what the seller can and cannot pay when the borrower uses a VA loan. The rules state that the seller cannot pay more than 4 percent% of the total home loan in closing costs.
VA non-allowable versus allowable fees can be complicated to figure out. However, it's a rule that helps Veterans and active service members get their foot on the housing ladder more easily. If in doubt about anything, contacting a lender for more advice on VA loans is always a good practice.