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.
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.
|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
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.
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:
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.
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:
Any other changes not listed above are usually non-allowable, similar to how regular VA loans limit 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.
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.