Buying a new home can be an exciting prospect. Financing that home can mean reading through multiple pages of loan documents, trying to understand what you are obligated to pay, what is part of your loan, and what the seller is responsible for. When it comes to financing your home, one of the biggest areas of confusion can be the closing costs.
Here I am going to explain closing costs typically associated with VA and FHA loans, information that will help you to understand what you are paying for at the closing.
What Are Closing Costs?
To help you understand the closing costs for your loan, I first want to explain what closing costs are. Typically, these costs are the fees that are needed to complete a home loan. Here are a few of those costs:
- Appraisal Fee – Covers an appraisal to determine if your property value is worth the amount being borrowed.
- Home Inspection – This inspection is to make sure that the home is structurally sound to live in and is likely to be required for a government backed loan.
- Application Fee – This covers the processing of your loan application, including credit checks and administrative expenses.
- Assumption Fee – Only applies if you take over the remaining balance of the seller’s mortgage.
- Attorney’s Fees – A number of states require an attorney to be present at the closing of any real estate purchase.
- Prepaid Interest – Many lenders require you to pay the interest that will accrue from the date of the closing to the date of the first payment and this amount will be dependent on the size of your loan.
- Loan Origination Fee – This is a charge by the lender for evaluating and preparing your mortgage loan. It can also be referred to as the underwriting fee, administrative fee, or processing fee. Elevation Mortgage does not charge this fee, just an underwriting fee and a processing fee.
- VA Funding Fee – All VA loans require this fee, which can range from 1.2% – 3.3%.
Other fees will include property taxes and insurance, mortgage insurance fees, and title fees. Depending on how you purchase your property, you may deal will just a few or all of these costs.
Are VA Loan Closing Costs Different?
With a VA loan, closing costs are not much different from a conventional loan but there are two important exceptions. The VA limits the closing costs that lenders can charge on these loans, most notably, the lender’s fee for attorney services, settlement charges, prepayment penalties, and mortgage broker commissions. There are also caps on the amount a lender can charge for origination. Typically, lenders cannot charge more than 1% of the loan amount as an origination fee. Some fees are considered non-allowable and that comes up if the lender chooses to itemize instead of charging the flat fee.
You can also negotiate for the seller to pay some or all the closing costs. Your lender may also offer the option of rolling the closing costs into your loan, but this means that you will pay more interest on your loan over time.
Do FHA Loans Have Closing Costs?
While FHA loans are guaranteed by the U.S. government, these loans also do have closing costs associated with them. However, due to the fact that these are government backed loans, the financial institutions typically require lower down payments, closing costs, and a lower income threshold.
As a borrower, you are still going to be required to paying closing costs, but you may be able to role a portion of those costs into your loan. As part of an FHA loan, you will be required to pay a mortgage insurance premium upfront and there will be monthly payments for that insurance rolled into your mortgage payment.
For a majority of borrowers using these programs, there are still closing costs but there are also limits on what you can be charged and how much. We work with our clients to help them understand their options to cover their closing costs and answer any questions you have. We have also worked with military families in Colorado for years, so we can address your unique financing needs. Interested in purchasing a home in Colorado Springs? Contact us to discuss your financing options.