For a lot of military folks in California, VA loans are the financing “tool of choice” when buying a home. It’s easy to see why. This unique mortgage program allows eligible borrowers to buy a house with no money down, and usually without requiring mortgage insurance. Those benefits are hard to beat.
But what about closing costs? Do home buyers in California have to pay closing costs on VA loans?
The answers is yes. In most cases, borrowers who use the VA mortgage program to buy a house in California have to pay closing costs. They can add up to thousands of dollars. So it’s obviously something you want to know about in advance, in order to prepare.
Let’s take a closer look at VA loan closing costs in California.
VA Loan Closing Costs Explained
The collective term “closing costs” refers to the different fees and charges home buyers (and sellers) have to pay during the course of a real estate transaction. Most of these costs are paid by the buyer, especially in cases where the home buyer uses a mortgage loan to finance the purchase.
Here in California, VA loan closing costs can include such things as:
- Mortgage origination fees
- Home appraisal fees
- Title-related charges / insurance
- Mortgage discount points (in some cases)
- Government-imposed recording fees
Note: All types of mortgage loans have closing costs. That includes VA, FHA and conventional. But this article will focus on California VA loan closing costs in particular, for the sake of clarity.
Average Amount Paid by Home Buyers
A home buyer’s closing costs can vary for a number of reasons. For instance, some buyers choose to pay discount points to lower their rates while other borrowers do not. The location of the home and type of loan being used can also influence the total amount paid by the buyer.
In California, VA loan closing costs tend to average between 3% and 5% of the amount being borrowed. For example, on a loan amount of $500,000, the borrower’s total closing costs might fall somewhere between $15,000 (3%) and $25,000 (5%). But they can fall outside of that range, in some cases.
The good news is you won’t be surprised by the amount you have to pay on closing day. You’ll get an estimate of these costs on the front end, around the time you apply for the loan. You’ll also receive a “Closing Disclosure” shortly before your scheduled close date with a finalized amount.
Who Pays What?
The Department of Veterans Affairs has specific rules regarding who can pay what, between the buyer and seller. Here’s a breakdown of who pays which closing costs in a California VA loan transaction.
The seller typically pays:
- Real estate agent commissions
- Real estate brokerage fee
- Termite inspection report, when applicable
The buyer typically pays (or negotiates for the seller to pay):
- Loan origination fee
- VA funding fee
- Mortgage discount points used to lower the rate
- Credit report fees
- VA appraisal fee
- Real estate taxes
- State and local taxes
- Title insurance
- Recording fees charged by state and local government
Seller Contributions Are Allowed
In some real estate transactions, the seller might agree to pay some of the home buyer’s closing costs. This is true for FHA, VA and conventional mortgage scenarios. Sellers often use this strategy in sluggish real estate markets, when they have to go above and beyond to land offers from buyers.
But the Department of Veterans Affairs limits the amount of money a seller can contribute toward the buyer’s VA loan closing costs. In California, and nationwide, these “seller concessions” are usually limited to 4% of the loan amount.
As it states on the VA’s website:
“We require that a seller can’t pay more than 4% of the total home loan in seller’s concessions. But this rule only covers some closing costs, including the VA funding fee. The rule doesn’t cover loan discount points.”
It’s also important to understand the distinction between “allowed” and “required.” In California, home sellers are allowed to pay a portion of the buyer’s closing costs when a VA loan is used. But they are not required to make such a concession. It’s negotiable, and it largely depends on local housing market conditions. So seek your real estate agent’s advice on this matter.
Understanding the VA Funding Fee
In addition to closing costs, California VA loan borrowers usually have to pay what’s known as a “funding fee.” This is a standardized charge imposed by the U.S. Department of Veterans Affairs. It helps fund the VA home loan program. Without it, the program would cease to function as it does today.
In California, these funding fees typically range from 2.3% to 3.6% of the total loan amount. That’s for borrowers who make a down payment less than 5% (including those who finance 100% of the purchase price to avoid a down payment). Borrowers who put down 5% or more pay a smaller funding fee.
Some borrowers are exempt from paying the VA loan funding fee. This includes those who are receiving compensation for a service-related disability, among others.
The good news is that this fee can be “rolled” into the mortgage balance, and paid off monthly as part of the mortgage payment. Or it can be paid up front, at closing, if the buyer so chooses. As it states on the Department of Veterans Affairs website: “It must be paid at time of closing or included in the loan balance.”
The other closing costs for California VA loans (mentioned above) cannot be rolled into the loan and have to be paid when you close.
Have Questions About the Program?
Bridgepoint Funding specializes in the VA home loan program. We’re passionate about this program because it rewards our brave men and women in uniform. It’s one of the best mortgage options available for military home buyers in California.
If you have questions about closing costs, or any other aspect of this program, please contact our staff. We serve the entire state of California and welcome your questions!