The VA loan has many advantages including 100% financing and low closing costs. The VA determines which closing costs a borrower can pay, which are usually much less than the closing costs on any other loan. Despite that fact though, there are still closing costs that must be paid. What if you can’t pay them at the closing? Does the VA allow you to roll them into your VA loan?
Unfortunately, the VA doesn’t allow veterans to roll the closing costs into their loan. It makes sense, since they are already providing 100% financing. But that doesn’t mean that you are on the hook for thousands of dollars in closing costs at the closing. There are a few other ways to get your closing costs handled.
Seller Paid Closing Costs
The seller may pay your closing costs for you. Notice that they don’t have to pay the costs; it’s not a VA requirement. But, if the seller recognizes the value in helping you with the costs, they may be willing to do so.
Here’s how it works. Let’s say you offered $150,000 on a home. The seller knows it’s worth at least $175,000, so there is some wiggle room. As a part of the bid, you tell the seller that you can’t pay your closing costs. You would like to ask for a seller concession. If the closing costs equal $6,000, you would ask the seller to accept a bid of $156,000 and give you a seller credit of $6,000 at the closing.
As you can see, this is like rolling the closing costs into the loan without making it seem as if you are doing so. You get the higher loan amount of $156,000, even though the seller only gets $150,000 of it (minus his costs). The remaining funds cover the closing costs of the loan.
The seller cannot credit you more than the amount of your actual closing costs, though. The closing costs charged must also be ‘usual and customary’ for the area. In addition, sellers can give a 4% seller concession, which could cover things like prepaid items (interest, taxes insurance) or make up for any issues there are with the home.
Lender Paid Closing Costs
Another option you can explore if you can’t pay the closing costs upfront is to ask for lender-paid closing costs. This may sound too good to be true. Why would a lender pay your closing costs? Here’s the catch – they don’t do it for free.
The lender will increase the interest rate charged to make up the difference in the costs that they pay or don’t charge. Usually, you’ll see an increase between 0.5% and 0.75% on your interest rate. This could mean you don’t have to bring any money to the closing. Keep in mind, though, this increases your mortgage payment for the life of the loan. If you plan to keep the loan for 30 years, that adds up to a lot of ‘extra’ interest. Make sure you know the full implication of the cost of doing this to ensure that you are making the right choice.
As you can see, there are a couple of ways to roll your closing costs into your mortgage, without actually doing so. It makes it easier for veterans to come to the closing table with little to no money. As we stated above, make sure you realize the implications this has on your mortgage over the long term so that you make the choice that is best for you.