VA Loan Closing Costs: Who Pays and How to Reduce Them

The VA Non-Allowable Fee List: What Lenders Cannot Charge Veterans

VA loan rules distinguish between fees veterans can pay and fees they cannot. Per VA Lender Handbook Chapter 8, Section 8.03, lenders are prohibited from charging VA borrowers: attorney fees incurred for the lender’s own benefit, real estate brokerage commissions, prepayment penalties on prior loans, HUD-type inspection fees when FHA standards are applied, lender-caused lock extension fees, and document preparation fees charged by the lender beyond what’s permitted in the 1% origination cap framework. These aren’t soft guidelines — they’re regulatory prohibitions. A Closing Disclosure listing any of these as buyer charges on a VA loan is a compliance violation that must be corrected before funding.

Review your CD carefully. If you see attorney fees, broker commissions, or unusual lender-imposed charges, ask your loan officer to identify the authority for each charge and whether it falls within the 1% origination cap or is separately disclosed as a third-party fee. VA compliance violations get caught routinely in post-closing audits; proactive review before signing is cleaner for everyone.

What Veterans Do Pay: The Complete Allowable Fee Structure

Origination fee — capped at 1% of the loan amount: On a $350,000 loan: maximum $3,500. The 1% cap is regulatory, not a suggestion. Everything the lender charges for the loan production — underwriting, processing, loan officer compensation — must fit within this cap. Competitive VA lenders often charge 0.5% or zero origination, recovering compensation through the rate. Always ask: “What is your origination charge on this loan?” before comparing rates — lenders who appear cheaper by rate may have higher origination charges that more than offset the rate savings.

VA funding fee: This is the program’s self-funding mechanism, paid to the Department of Veterans Affairs rather than the lender. 2025 rates:

• First use, 0% down: 2.15% of loan amount
• First use, 5–9.99% down: 1.50%
• First use, 10%+ down: 1.25%
• Subsequent use, 0% down: 3.30%
• Subsequent use, 5–9.99% down: 1.50%
• Subsequent use, 10%+ down: 1.25%

Exemptions: any veteran receiving VA disability compensation at any percentage is exempt from the funding fee permanently. Active duty recipients of the Purple Heart are exempt. Surviving spouses of veterans who died in service or from service-connected causes are exempt. The exemption applies to every VA loan — purchase, IRRRL refinance, cash-out — for life. If you’re rated at any disability percentage, confirm your Certificate of Eligibility (COE) reflects your exempt status before closing. Paying a funding fee you’re entitled to waive is real money: at 2.15%, the exemption saves $7,525 on a $350,000 loan.

Appraisal fee: VA appraisals in Texas run $600–$900 for residential properties, ordered through VA’s panel system. The fee covers both market value appraisal and Minimum Property Requirements (MPR) evaluation simultaneously — two functions in one visit, one fee. Paid upfront at time of order, before closing.

Title insurance and settlement: Texas title insurance rates are promulgated by the Texas Department of Insurance — identical at every title company for the same loan and purchase price. Owner’s policy on a $350,000 purchase: approximately $1,935 (customarily paid by seller in Texas). Lender’s policy with simultaneous issue: approximately $100–$300. Settlement/escrow fee: $500–$900 (varies by title company and is shoppable).

Survey: $400–$700 if current survey unavailable. Ask the seller in the purchase offer whether a current survey exists — if they have one from the past 5–10 years with no boundary changes, you can often use it and eliminate this cost.

Recording fees: $50–$150 in most Texas counties. County clerk charges for recording the deed and deed of trust.

Prepaid interest: Interest from closing date to end of that calendar month. At 7.0% on a $350,000 loan: daily interest is approximately $67. Closing on the 28th versus the 5th saves 23 days × $67 = $1,541 in cash at closing. Same total interest paid over the life of the loan — just a question of when the first payment comes due.

Escrow setup: 2–3 months property taxes plus 2 months homeowners insurance collected upfront as an escrow cushion. On a $350,000 Texas home at 2.0% tax rate and $3,200/year insurance: approximately $2,500–$4,500 depending on closing timing relative to tax billing cycle.

The 4% Concession Rule: VA’s Most Underutilized Feature

VA loan rules allow sellers to pay all standard buyer closing costs plus up to an additional 4% of the loan amount in “concessions.” VA defines concessions broadly — unlike conventional loans where concessions are limited to closing costs, VA concessions include:

• Payment of the VA funding fee on the veteran’s behalf
• Prepayment of the veteran’s property taxes and insurance (funding the escrow account)
• Payoff of the veteran’s existing debts (used strategically to reduce DTI and qualification)
• Temporary or permanent interest rate buydowns funded by the seller
• HOA fees at closing

On a $350,000 VA loan, 4% concessions = $14,000. Combined with seller paying all standard closing costs (~$4,000–$5,500), total seller contribution potential is $18,000–$19,500. Applied strategically: $7,525 funding fee + $4,500 standard closing costs + $4,500 escrow setup = $16,525. The veteran potentially closes with zero cash out of pocket beyond the earnest money, which credits back at closing.

Market conditions determine whether you can negotiate this. In a buyer’s market or with a motivated seller carrying costs on a property that’s been listed 60+ days, a full seller contribution request is reasonable and often accepted. In a multiple-offer competitive market, a concession request reduces your effective offer price — a $360,000 offer with $14,000 in concessions nets the seller $346,000. Structure your offer with this in mind: if the property is worth $360,000 to you, offer $360,000 with concessions rather than $347,000 without — the seller’s net is similar, your out-of-pocket drops dramatically.

Financing the Funding Fee: The Math on This Decision

The VA funding fee can be financed into the loan balance rather than paid at closing. On a $350,000 purchase with a 2.15% first-use funding fee: $7,525 financed into the loan. Loan balance becomes $357,525. Monthly payment increase at 7.0% over 30 years: approximately $50/month. Total additional interest paid over 30 years if loan is held to maturity: approximately $10,500.

Against that: you preserve $7,525 in liquid cash at closing that could be used for emergency reserves, home improvements in year one, or investment. For veterans who are cash-constrained at closing, financing the funding fee is the obvious choice — you’re trading $50/month in payment for $7,525 in immediate liquidity. For veterans with ample reserves, paying the funding fee at closing saves $10,500 over the life of the loan — worthwhile if you plan a 30-year hold. For the average hold period of 7–10 years, the break-even is closer: $7,525 out of pocket now vs. $50/month × 10 years × 12 months = $6,000 in additional interest. Marginally favors financing the fee at a 10-year hold.

The Zero-Cash-to-Close VA Purchase: How It Actually Works

A VA purchase transaction with zero cash from the veteran is achievable in the right market conditions with the right offer structure. The mechanics:

1. Funding fee financed into loan (not paid at closing)
2. Seller pays all standard closing costs (appraisal, title, recording, etc.) as part of the purchase agreement
3. Seller concession (up to 4% of loan amount) covers escrow setup and any remaining items
4. Lender credit (accepting a slightly higher rate) covers any lender fees not absorbed by the 1% cap
5. Earnest money ($1,000–$3,000 typically) paid upfront but credited back at closing against seller concession — effectively returned

This structure is most achievable on new construction (builders routinely offer large closing cost incentives as a sales tool — 3–5% of purchase price is common on unsold inventory), motivated sellers with carrying cost pressure, relocation sellers on tight timelines, and in genuine buyer’s market conditions where inventory is high and seller concession requests are standard. In a hot seller’s market with multiple competing offers, a zero-out-of-pocket structure typically makes your offer uncompetitive — sellers choose cleaner offers. Read your specific market before leading with maximum concession requests.

VA vs. Conventional: Total Cost Comparison Over 7 Years

$350,000 Texas purchase, first VA use, 720 FICO, comparing programs:

VA loan, 0% down: Loan $357,525 (2.15% fee financed). Rate 6.875% (no LLPAs). Monthly P&I: $2,348. No PMI. Monthly PITI with Texas taxes at 1.9% and $3,200/year insurance: $3,223.

Conventional, 5% down ($17,500): Loan $332,500. Rate 7.0% (6.875% + modest LLPA at 720). Monthly P&I: $2,213. PMI at 0.60%: $166. Monthly PITI: $3,254.

Conventional, 20% down ($70,000): Loan $280,000. Rate 6.875%. Monthly P&I: $1,838. No PMI. Monthly PITI: $2,713.

VA vs. conventional 5% down: VA saves $31/month over 7 years = $2,604 in payment savings. Plus: VA buyer preserves $17,500 in down payment capital. At 7% annual return, that $17,500 grows to approximately $28,100 over 7 years. Total 7-year financial advantage of VA over conventional 5% down: approximately $2,604 + $10,600 opportunity return on preserved capital = $13,204. VA wins decisively.

VA vs. conventional 20% down: Conventional saves $510/month. Over 7 years: $42,840 in payment savings. But conventional buyer deployed $70,000 more in down payment. At 7%: $70,000 grows to $112,400 over 7 years — $42,400 in opportunity return foregone. Net advantage of conventional 20% down over VA: $42,840 – $42,400 = $440 over 7 years. Essentially a wash — unless you actually have $70,000 liquid and prefer the certainty of no mortgage insurance over the flexibility of preserved capital.