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For veterans using a VA home loan, understanding non-allowable fees is critical to avoiding unexpected closing costs. The U.S. Department of Veterans Affairs (VA) prohibits lenders from charging borrowers for specific services, a protection that can save you thousands of dollars. These costs must be covered by other parties, such as the seller or the lender. This guide provides a clear breakdown of VA non-allowable fees, explains who is responsible for paying them, and offers strategies to reduce your overall closing expenses.
VA non-allowable fees are specific closing costs that the VA has explicitly forbidden mortgage lenders from charging to eligible veterans, service members, and their families. The purpose of this rule is to make homeownership more affordable for those who have served. Unlike with conventional loans, a VA borrower is not expected to pay these items. Common examples include application fees, escrow fees, and prepayment penalties.
To clarify, here is a comparison of common allowable and non-allowable fees based on VA guidelines:
| Allowable VA Fees (Borrower Can Pay) | Non-Allowable VA Fees (Borrower Cannot Pay) |
|---|---|
| VA funding fee | Application fees |
| VA appraisal fee | Lender-requested appraisal reviews |
| Credit report fees | Real estate agent commissions |
| Title insurance | Prepayment penalties |
| Origination fee (up to 1%) | Escrow fees |
| Discount points | Attorney fees (for lender) |
| Recording fees | Document preparation fees |
Lenders have two options for structuring their charges. They can charge a flat loan origination fee of up to 1% of the loan amount. This single fee can bundle services that might otherwise be itemized, including some that are typically non-allowable, like document preparation.
Alternatively, a lender can choose to itemize each service fee separately. In this scenario, they are strictly prohibited from listing any non-allowable fee on the borrower’s closing disclosure. If these services are required for the transaction, their cost must be absorbed elsewhere.
Since the borrower cannot be charged, non-allowable fees are typically covered by one of three parties:
While non-allowable fees are off the table, allowable fees can still add up. Here are practical ways to reduce your financial burden at closing.
Negotiate Fees with Your Lender Many lender fees are negotiable. Based on our experience assessment, you can ask your lender to eliminate or reduce certain charges. In return, you can promise a smooth and timely closing process by submitting all required documents promptly.
Request a VA Funding Fee Exemption The VA funding fee is a standard allowable fee, but it can be waived entirely for veterans who receive VA disability compensation. Surviving spouses of veterans who died in the line of duty or from a service-connected disability are also eligible for this exemption.
Ask for Seller Concessions Even if your lender won't budge on fees, you can negotiate with the seller. As mentioned, seller concessions are a powerful tool on VA loans. A seller's contribution can directly reduce the cash you need to close.
Consider Discount Points Paying for discount points upfront lowers your mortgage interest rate for the life of the loan. Each point typically costs 1% of the loan amount and reduces the rate by about 0.25%. This strategy increases your closing costs now but saves money long-term on interest.
Roll Closing Costs into the Loan VA borrowers have the option to finance their allowable closing costs by rolling them into the total loan amount. This reduces the cash required at closing but increases your monthly payment and the total interest paid over time.
Understanding your VA loan benefits, including the protection from non-allowable fees, is essential for a cost-effective home purchase. By negotiating with your lender, seeking seller assistance, and exploring fee exemptions, you can significantly reduce your out-of-pocket expenses.
