Within the last 10 or more years, VA Loans have become more profitable and have facilitated the purchase homes by veterans. In some cases, without the VA loan certain veterans would still be renters and not homeowners. Since 2007 VA and FHA Loans have gone main stream and are providing the financing of or financial recovery. Unlike conventional loans, VA loans have certain fees that cannot be paid by the borrower. In the lending business they fees are often referred to as “allowable” and “non-allowable” fees. In this blog post I will attempt to clear-up some of the confusion surrounding VA loans.
As you may know, borrowing money cost money; not only the interest and repayment of the debt but the cost of obtaining the loan. There’s work involved when processing a loan and the cost for this work or service is referred to as “loan fees.” The Department of Veterans Affairs determines what closing costs the veteran (borrower) is allowed to pay. The local VA office determines the allowable costs based on local custom. Therefore, allowable costs may be different in different states. The VA provides lending guidelines which cover the fee names and categories. However, due to regional differences they don’t cover them all.
After an escrow is opened your mortgage broker or lender will send a request to escrow for an estimated HUD1 statement. A VA loan is backed by the full faith and credit of the United States Government. Because it is tied to Government money, federal bureaucrats decided which fees the borrower can pay and which fees must be paid by someone else. Among other things, the HUD clearly defines the fees associated with the transaction and allocates the fees to the borrower or someone else.
The rules become a little more complicated if the loan is being originated by a Mortgage Broker and not a direct lender. For example, if the Mortgage Broker is charging an “Origination Fee”, the Mortgage Broker is required to credit the Buyer/Borrower for all non-allowable fees.
Since all of the fees are in a sense a “hot potato” be certain your real estate agent or attorney clearly stipulates the allocation of fees in the Purchase Agreement. Otherwise, your loan and escrow could blow-up halfway through escrow. Not fun.
Let’s get to the point, what are VA non-allowable fees?
- Document preparation
- Loan closing or settlement(escrow)
- Attorney services for anything other than title work
- Preparing loan papers for conveyance
- Locking in interest rate services
- Mailing or postage charges, telephone calls, amortization schedules, general overhead
- Escrow charges
- Document preparation, notary, loan application, processing, loan broker fee other than your mortgage company, trustee’s fees or charges and tax service.
To obtain a copy of a more complete list of allowable and non-allowable closing costs please click here; VA list of fees
When making purchase offers using a VA loan you may find a seller will bypass your offer for another or, flat out reject your offer. This could happen if the seller has already reduced the price of their property to their bottom line. Accepting an offer with a VA loan contingency means the seller would end up paying most, if not all of the non-allowable costs. Contrary to popular belief, the seller has no obligation to pay the buyer’s/borrower’s non-allowable costs. The seller can decline your purchase offer all together or offer to pay a portion of the closing costs with other parties to the transaction picking up the difference. Sometimes the mortgage broker and real estate agents will decide to pay a portion of your closing costs. In summary, as long as a party to the transaction other than the buyer pays the fees, the loan can go through and escrow can close.
There are several strategies you can use when writing offer using a VA loan. A good real estate agent or broker will guide you through the process of writing offers that seller’s may not like but will be afraid to reject.