When buying a home with the VA loan, there is no down payment, making it an excellent option for veterans. However, one financial obstacle that veterans will still need to face is closing costs. Closing costs are paid at closing for the lender’s fees, insurance, taxes, title transfers, and other fees needed to complete the purchase.
How Much Are Closing Costs?
While the exact amount can vary in different parts of the country, they usually average between three and five percent on a less expensive home. There are online loan estimate forms that can help you determine an approximation of what your total closing costs will be.
These costs are paid for by you out of pocket, but in some cases, the seller will pay up to four percent of the closing costs for the buyer. This is discussed in negotiations with the seller, and they can help pay for any of the fees, up to the four percent mark. There are also programs that can help you pay for closing costs if you need financial assistance.
What Fees Are Included in Closing Costs?
While most of the closing costs you will pay are the same for a VA loan and another type of loan, the VA does have some differences. There are some fees that the VA prohibits, including mortgage broker commissions, prepayment penalties, attorney fees, and settlement charges. The only attorney fees that the VA will allow are for title work, no other fees will be included in closing costs.
While the fees included in your closing costs can vary, depending on your location, these are some that can give you a general idea of what you can expect.
The cost of an appraisal can vary, but it is usually around $500. The VA sets the cost of the appraisal, and it does need to be paid upfront. The appraisal is to determine the full value of the house, to ensure you are not overpaying, and to make sure the home meets the VA’s minimum standards.
The lender will use this to determine if the home is in a flood zone; this is usually around $20. If it is, you will need to purchase flood insurance too.
Flood insurance is an ongoing insurance policy that is required by your lender and is not usually covered by a standard homeowner’s insurance policy. The first year’s premium is due at closing, and depending on how much it is, you may end up having a lot more money added to your closing costs.
Homeowners Association (HOA) Fees
Often HOAs will charge you annual dues, which are not necessarily included in your closing fees, but you may want to factor the amount due into what you will need for closing.
The full year’s premium for homeowner’s insurance is due at closing. The standard policy does not protect against flooding, and it may not cover damage from natural disasters like earthquakes. Usually, these policies only cover things like trees falling on homes, fires, and other things like that.
Loan Origination Fee
This is the lender’s compensation for the loan, which the VA limits to one percent of the total loan amount. The lender might not include fees for underwriting or processing the loan in this fee.
The lender can itemize the fees up to one percent or they can charge a flat rate of one percent. If they choose the flat rate option, they are not allowed to charge you additional processing fees. This is unique to the VA loans.
Your local area sets this fee, and it is to make the sale public record. It can be as little as $20 or up into the hundreds of dollars.
Reserves for Tax and Insurance
This is another fee that varies by the taxes and insurance on the home and the area. This escrow is intended to cover the taxes and insurance premiums when they become due. Your lender can help you establish how much you will need for this.
A company will come out to the property to determine where the physical property lines are. While this is not usually required, it is recommended so you know exactly where the boundary lines are on your property. This usually costs around $400.
This fee is difficult to average, because it is dependent on the loan amount, purchase price of the home, and your location; ranging from a few hundred dollars to over $1,000. The title report and title insurance protect both the owner and the lender from someone claiming ownership to the house and winning in a lawsuit. If that happens, both the owner and the lender are reimbursed for the loss.
VA Funding Fee
This is a one-time fee the VA charges most borrowers for their loan benefit, and it can be rolled into the mortgage if desired. If a veteran is receiving VA disability, they are exempt from paying the VA funding fee. This fee helps fund future loans for other veterans. The fee can be anywhere between 0.5 percent and 3.3 percent, depending on the loan amount.
When buying a home, your employment and your income are a key factor in whether or not you will be approved for a mortgage loan. If you are self-employed, you may face some unique challenges to get a loan. The income from being self-employed is often less stable and consistent than what you would receive working for someone, and this inconsistency can lead to your lender needing to probe more deeply into your financial records.
Who is Considered Self-Employed?
You are considered self-employed if you have sole ownership or at least 25 percent ownership in a business or if you are a freelancer or contract worker whose income is mostly covered under IRS Form 1099-MISC.
Documentation You Need
If you are self-employed, you will need to provide your lender with a year-to-date profit and loss statement, and something to show your current finances, two years of your individual tax returns and business tax returns, and a list of your partners and/or stockholders. The lender may also want to see your business license and a letter from a CPA stating that you are still in business.This is more in-depth than you would have to provide as an individual because your lender needs to ensure that you have the income necessary to make your mortgage payments. They need two years of income records to ensure that your income is not dropping every year and is either remaining steady or increasing. If you do have a significant drop every year, you will need to provide a written explanation for this drop, but if it is too big, your lender is likely to decline your loan application.The process of proving your income is a little easier if you have recently taken over a family business, if the business has a proven track record of success. In this case, you only need to provide one year of income, though the more you give the lender, the better they can determine how much to give you for your mortgage loan.
One area the lenders will focus on is the business losses and expenses. Your net income is what you make after your expenses, so everything you write off on your taxes is not taken into account by lenders. The tax write offs are something that businesses like to utilize on their taxes, but having too many expenses can be problematic when seeking a loan. Writing off expenses gives you less taxable income, which is all that lenders are allowed to count when they process your loan application.For example, you made $80,000 last year, but you wrote off $25,000 of it in expenses. This means that your net income for the last year is only $55,000, which is all the lender will count in your income.
Keep Personal and Business Accounts Separate
Proving your income is difficult enough when you are self-employed, so keeping your personal and business finances separate is important. If you work alone, it can be easier, since you know which expenses are personal and which are business, but if you have a partner it can be a little bit trickier.
Your home is getting older, and the windows have been letting the cold air seep in, taxing your poor heating system, and raising your energy costs. It can be expensive to upgrade your home to make it more energy efficiency, but if you are a veteran, you may be able to obtain the VA Energy Efficient Mortgage, which allows you to add the cost of VA approved energy efficient improvements into your purchase or refinance VA loan.
Using the EEM Loan
Buying an older home that needs energy efficient improvements. ·
Buying a home that is already energy efficient to help boost the amount of money you can get in your mortgage loan.
Refinancing your current mortgage to upgrade the energy efficiency of the home.
How Much You Can Borrow
It is usually easy to get a loan of up to $3,000 approved, you just need to provide your VA lender with either an itemized quote from the contractor or the contractor’s bid, along with manufacturer information for every item. To obtain a loan between $3,001 and $6,000, you will also need to provide an energy audit that shows the average utility costs for a year in the home. The lender will then decide if the improvements in the proposal will make a significant enough impact on the home’s utilities.
An appraisal that lists how the improvements will increase the value of the home can help you obtain an EEM for over $6,000. It is difficult to get a loan over $6,000 for this, and both the VA and your lender have to approve it. Your lender will also determine if the increase in your mortgage from this is going to offset the monthly savings in energy reduction.
What Improvements Are Eligible
Some of the things you can get your EEM approved for include:
Windows and doors
Solar heating and cooling systems
Vapor barriers, storm windows/doors
Caulking and weather-stripping
Permanent air conditioning units
There are also some upgrades that the loan will not cover:
Window air conditioning units
Unique Aspect of the EEM
If you are rolling your VA EEM Loan into a mortgage to purchase or refinance a home, you can actually begin working on those improvements before closing. If they are completed before closing, you have to provide receipts for the work, and you can only include work completed within the last 90 days.
If your improvements are not finished by closing day, or you have chosen to wait until after closing day to begin, your lender will place the cash needed for your improvements into escrow, and you will be reimbursed for the funds once they are completed. You have six months to complete the projects and must provide your lender with proof of competition. If you are unable to complete the improvements within six months, the unused funds will be applied to the principal balance of your loan.
One of the parts of receiving a mortgage loan is the appraisal. An appraiser will come to the property and appraise its value, which helps determine how much a lender will give you for a mortgage loan on the property. When getting a VA loan, this same process is observed, but the VA has stricter guidelines when it comes to its appraisals. Since the VA guarantees these loans, they want to ensure the house meets their standards.
Sometimes, these stricter guidelines can make things difficult for a borrower. For example, if the house you are buying is on the market for $250,000 and you have offered to buy it for $230,000, but the appraisal values the house at $220,000, the VA will only lend you the $220,000. This means you will need to either renegotiate with the seller to drop the price by $10,000, or you need to make up the difference on your own.
Before a VA appraiser files their official appraisal value, they will contact the lender and tell them the value appears to be less than the purchase price, which invokes the Tidewater Initiative.
The lender has two days from there to provide the VA with comparable homes to support the purchase price, and they usually work with the buyer’s real estate agent for help with this. If the appraiser does not find an increase in value from the compared homes, they are required to provide a written explanation as to why that is.
At this point, the lower appraisal value is considered official, but you can then seek a formal appeal, known as a Reconsideration of Value (ROV).
Reconsideration of Value
Getting an ROV means the VA reevaluates how much the home is worth, and this has the potential to change the VA appraisal amount.
To get the ROV you can try to find other similar houses for sale to compare the one you want to, and if you are able to find other homes similar to your expected price range, the VA might be willing to reconsider their appraisal. There is always a chance that the appraiser missed something or made an error, so you might be able to get the VA to reconsider.
When the ROV Fails
ROVs do not always work, sometimes the appraisal value is still too low to get the full loan amount you need to buy the house. If this happens, you can attempt to renegotiate the price with the seller; considering the circumstances, they may be willing to lower it to the VA appraisal value. The lower appraisal value might make the seller realize the house is overvalued and make them willing to lower the price; often the price is set higher because of its sentimental value to the seller.
If the seller is not willing to lower the price, and this is your dream house, you might be able to cover the costs yourself. Unfortunately, you will have to pay this difference in cash, out of pocket, so it is not always a viable option.
For months now, we’ve read the news covering the trade war between China and the U.S., particularly regarding the tariffs placed on China’s exports to the U.S. While people on one side of the aisle are saying, “It’s about time,” the other side says, “this is not going to end well.”
Most recent in a series of economic strategic moves, the Federal Reserve bank announced cutting interest rates by a quarter of a percent. What that means, basically, is that banks and borrowers are going to pay a lower interest rate to borrow money from each other. Designed to bolster confidence in borrowing, and therefore spending and hiring, a federal interest rate cut intends to keep wind in the sails of the American economy as prices of some items rise and people dependent upon favorable U.S.-China trade relations struggle.
While a lower federal interest rate could impact you in some ways, it’s not directly linked to mortgage interest rates. It’s more of a domino effect where, as banks’ interest rates are lowered, interest rates in other industries follow suit. While no one grins at the prospect of an economic downturn and all that could come with it, if you’re considering purchasing a home in the near future, it could work out in your favor.
Broadly speaking, people and government entities who have some control over economic decisions lower interest rates in order to make it easier for people to keep spending their money because
it’s easier for your to put money into a house if your mortgage interest rate isn’t sky-high
it’s easier to make renovations or furnish your home if your credit card company’s interest rates go lower, which could be another by-product of a lower federal interest rate.
So, what should you do?
If you’re considering buying a home and you have a steady, reliable source of income, this may be the time to make a move. Start doing the research and getting names of potential mortgage lenders, and find out what kind of rate you can get. If it’s four percent or lower, that’s pretty good.
Already own a home and a mortgage? This could be an opportunity to renegotiate your interest rate and refinance your home. If you’ve lived in the home for a year or longer, you may be eligible. Check with your current lender to find out what kind of rate you could get if you refinance, and what that process would look like. It could lower your monthly payment and the total that you pay for your home when it’s all said and done. If your income allows for a higher monthly payment, you can change the terms of your loan, turning a 30-year loan into a 15-year loan. You’ll speed up the rate at which you build equity in your home and get that much closer to being debt free. Your mortgage lender can guide you through your options and shed a lot of light on the outlook in the mortgage industry to know if now’s your best chance or if a better rate might be just around the corner.
But if experts are saying the economy is slowing down and may get worse…
We like that you’re thinking in that direction. It literally pays to be smart with your money. What would be great is if the U.S. and China could work out this trade war RIGHT after you secure that low mortgage rate. Recession crisis averted, jobs secure, and a collective sigh of relief rings out across the land.
Meanwhile, know that these industries are the ones currently most affected by the tariffs. If you’re employed in one of them, it might be a scary time to take on a new debt. As it was once said by a great king, everything exists in a delicate balance. Industries not directly affected by current economic policies may still feel some ripples. If you do take advantage of lower rates on your mortgage, your credit cards, or even student loans, it’s wise to still keep a level head. Increasing your budget and spending more than you originally had in mind is likely not in your best interest, but it may be the perfect time for you to make some reasonable investments for a better deal than you would have gotten in the past, and perhaps better than you’ll get if you wait longer.