VA mortgages are a great way for those who served in the United States Armed Forces to purchase a home. Many Southern California sellers have rejected offers using VA financing because they believe they are required to pay certain closing costs for the buyer. We call those closing costs “non-allowables” because the VA won’t insure the loan if the veteran pays them.
Those VA non-allowable closing costs are not limited to but include:
- Underwriting Fee
- Processing Fee
- Mortgage Broker Fee
- Administration Fee
- Tax Service Fee
- Wire Fee
- Escrow Fee
If the VA won’t allow the veteran to pay those fees but lender’s charge them, how do they get paid?
Sellers can pay those costs, real estate agents can pay them or the loan originator can absorb them. I recommend that buyers and their agents ask the lender for a good faith estimate for a “no junk fee” VA home loan prior to presenting an offer to the seller.
On a $400,000 VA home loan, the non-allowable closing costs could be as much as $4000 in California. That equals approximately 1% of the loan amount. If a wholesale VA mortgage rate were 5% today, the lender has two options:
- charge a $4,000 discount fee, in addition to the normal 1% loan origination fee, to absorb the VA non-allowable closing costs OR
- the buyer might elect to accept a higher mortgage rate (about .25%) so that the yield spread premium can absorb those VA non-allowable closing costs
Some real estate brokerages, like Redfin, offer a commission rebate. That rebate can be used to pay some or all of the VA non-allowable closing costs.
Finally, the seller can but is not required to pay up to 4% of the loan amount of the buyer’s closing costs.