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The home buying process can be confusing, but...
Any mortgage approval can be a confusing process. There are new loan terms used by loan officers and loan processors rarely used outside of the home buying process. And the VA loan is no exception. Earnest money, appraisals, inspections, title insurance, points…all can be a part of the VA loan process. Yet there is some VA closing cost information we’d like to share to make things easy to understand.
The VA limits certain closing costs that can be paid by the veteran. A useful way to remember which fees are considered “allowable charges” is the acronym ACTORS. Those fees are appraisal, credit, title insurance, origination, recording and survey charges. These closing costs are considered “non-recurring” fees because the borrower will pay these fees only once during the VA loan approval process. Recurring fees are fees that will occur again in the future. Those fees are for items such as a homeowner’s insurance policy, property taxes and interest to the VA lender.
The VA borrower may also pay discount points, or simply “points.” A point is represented as one percent of the loan amount. Any VA loan will have various rate and point combinations for the VA borrower to choose. Paying one point may potentially reduce a 30 year VA mortgage rate by one-quarter of one percent. For instance, if a 30 year VA loan rate is at 3.50 percent with zero points, a 3.25 percent rate can be typically obtained by paying one point. How do you decide whether or not to pay a point? One approach is to divide the monthly savings into the amount of points paid. The result is how many months it takes to recover the point paid.
For example, on a 30 year $200,000 loan at 3.50 percent, the principal and interest payment is $898 per month. By paying one point, or $2,000, the rate is lowered to 3.25 percent for a payment of $870, reducing the monthly payment by $28. By dividing $28 into the $2,000 the result is 71 months. In this example, it will take 71 months to recover the initial $2,000 paid. By working with your loan officer, you can determine on your own if paying points is really in your “best interest.”
Your VA lender can also help you with your closing costs in the form of a lender credit. Just as a VA lender can have a variety of interest rate offerings based upon points, an interest rate can also be adjusted slightly upward, allowing the lender to provide you with a closing cost credit. This again is an option that should be discussed with your VA loan officer.
Finally, when a VA borrower makes an official VA loan application, the VA lender is required to provide a list of estimated settlement charges called the Good Faith Estimate. This estimate will itemize a host of fees charged by the lender as well as other third parties. This list of anticipated charges will be separated by lender and non-lender fees. The VA lender is responsible for the lender fees and these fees cannot vary during the course of the loan process. Other third party charges may in fact vary but within certain tolerance levels.
Contact your VA loan officer with questions about which fees are VA fees and which are not as well as which fees quoted fall within a specific range. Find out not only which fees you may have to pay but also determine which interest rate best suits your requirements. Closing costs can be confusing; but they don’t have to be.