Buying a home using a VA loan is full of advantages, including zero down payment, no private mortgage insurance (PMI), and significant shields against exorbitant closing costs.
One of the biggest cost-savings provisions is the VA prohibition of specific fees that are known as “non-allowable fees.”
These restrictions cap the lender’s origination charge at 1% and shift specific expenses to the seller or lender, reducing the financial burden on veterans.
We’ll look at here what VA non-allowable fees are, why they occur, and how you can avoid them. We’ll discuss some negotiation tactics including seller concessions and lender credits for saving you the most.
In this Article
What Are VA Non-Allowable Fees?
VA non-allowable fees are specific closing costs prohibited by the Department of Veterans Affairs from being charged to borrowers on VA loans. Under normal circumstances in a conventional mortgage, these fees might be passed on to the buyer. However, the VA’s guidelines shift these costs to lenders or sellers instead, ensuring veterans aren’t saddled with excessive or redundant closing charges.
- Purpose: Protect veterans by limiting out-of-pocket expenses.
- Common Examples: Escrow fees, lender’s attorney fees, and various administrative charges.
- User Intent: Veterans often search for how to avoid excessive VA loan fees; understanding non-allowable fees is crucial.
Why Do These Fees Exist?
The VA home loan program was established to render homeownership attainable and affordable for veterans, active-duty military personnel, and eligible surviving spouses. Closing costs can be an insurmountable expense for most homebuyers, so the VA enforces non-allowable fees to protect borrowers from paying duplicate or unnecessary fees. In practical terms, the policy:
- Eliminates certain add-on costs that often inflate mortgage closing expenses.
- Ensures a more streamlined and predictable cost structure for veterans.
- Encourages lenders to maintain fair pricing in exchange for the VA loan guarantee.
The 1% Origination Fee Cap Explained
The 1% origination fee is a cornerstone of the VA’s policy on closing costs. Instead of charging multiple various fees for underwriting or processing, the lender can charge a flat fee of 1% of the total loan amount. This fee is intended to cover the lender’s business costs of servicing the loan.
What Counts Toward the 1% Fee?
The following items typically fall within the 1% cap:
- Underwriting & Processing: Costs related to evaluating your application.
- Administrative Tasks: Document preparation and handling.
- Loan Origination & Funding: General costs for funding the loan.
How It’s Calculated: Examples
- $200,000 Loan: The origination fee cannot exceed $2,000.
- $300,000 Loan: The origination fee cannot exceed $3,000.
- $450,000 Loan: The origination fee cannot exceed $4,500.
Negotiating the Origination Fee
It’s possible to negotiate the origination fee, especially if you have a strong credit profile or if you’re shopping around with multiple VA-approved lenders. Tips for negotiation include:
- Comparison Shopping: Request Loan Estimates from at least three VA lenders.
- Ask About Lender Credits: Sometimes, a lender will credit you money toward other closing costs in exchange for a slightly higher interest rate.
- Explore No-Origination-Fee Loans: Certain lenders structure loans with zero origination fees, though you may face a higher interest rate.
Comprehensive List of Allowable VA Loan Fees
Even though some fees are non-allowable, VA borrowers are responsible for paying other legitimate costs. Below is a detailed list of allowable fees, along with typical ranges and who generally pays.
| Fee Name | Typical Cost Range | Who Pays? | Notes |
|---|---|---|---|
| VA Funding Fee | 0.5%–3.6% of loan amount | Buyer (can be financed) | Varies by service status, down payment size, and usage frequency |
| Appraisal Fee | $400–$700 | Buyer | VA-approved appraiser ensures property meets VA standards |
| Credit Report Fee | $25–$50 | Buyer | Covers cost of pulling your credit report |
| Title Insurance | $300–$1,500 | Buyer or Seller (negotiable) | Protects against title defects; cost varies by state |
| Recording Fee | $50–$200 | Buyer or Seller (negotiable) | Government fee to record the mortgage |
| Pest Inspection (varies by state) | $50–$150 | Typically Seller (in many states) | In some states, buyers can’t pay this fee; check local rules |
6. Common Non-Allowable Fees
The VA Lenders Handbook and various VA circulars outline the expenses that cannot be passed on to veterans. Below are the most frequent non-allowable fees you’ll see:
- Escrow Fee: Fees charged by escrow or settlement companies for handling funds during closing.
- Attorney Fees for Lender’s Counsel: If a lender hires an attorney, those costs cannot be imposed on the borrower.
- Notary Fees: Any fees related to notarizing documents are the lender’s responsibility.
- Processing or Application Fees: The lender’s overhead for processing and underwriting is covered by the 1% origination fee.
- Brokerage Fees: Real estate brokerage fees tied to the transaction are off-limits to pass on to you.
- Rate Lock Fees: Costs for locking in your interest rate cannot be charged to a VA borrower separately.
By design, these rules help veterans avoid hidden or excessive costs that can quickly add up in other mortgage programs.
7. Seller Concessions & Lender Credits
To further offset your VA loan closing costs, you can leverage seller concessions and lender credits.
Seller Concessions
- Definition: Contributions a seller makes toward the buyer’s closing costs.
- VA Rules: Sellers can contribute up to 4% of the home’s sale price. This can cover costs like the VA funding fee, prepaid property taxes, and homeowners insurance.
- Negotiation Tips: Work with a skilled real estate agent to request specific concessions in your purchase offer.
Lender Credits
- How They Work: The lender offers you a credit to reduce closing costs in exchange for accepting a slightly higher interest rate.
- Pros & Cons: Lower upfront costs versus paying more over time in interest.
- When to Consider: If immediate cash flow is a concern or you’re short on funds for closing.
Application to Different VA Loan Types
Non-allowable fees and the 1% origination fee cap generally apply to all VA loan types:
- VA Purchase Loans: The most common scenario, where veterans buy a primary residence.
- VA Cash-Out Refinance: Allows you to tap into home equity. Non-allowable fees still apply.
- VA IRRRL (Streamline Refinance): Designed to reduce your interest rate or change loan terms quickly. Standard non-allowable fee rules remain, although IRRRLs typically feature lower overall closing costs.
If you convert to a non-VA loan, these protections disappear. It’s critical to confirm the fee structure for your specific refinance or purchase scenario and to stay within VA guidelines.
Identifying & Disputing Non-Allowable Fees
Mistakes happen, and some lenders may include non-allowable fees out of oversight or ignorance. To protect yourself:
- Review the Loan Estimate (LE): You’ll receive this early in the application process. Verify each line item is permissible under VA guidelines.
- Check the Closing Disclosure (CD): You’ll receive the CD at least three days before closing. Compare it to the LE and the official VA non-allowable fee list.
- Ask for Clarification: If you see a dubious fee like “document prep” or “administrative fee,” question your lender. They should remove or reclassify it if it’s non-allowable.
- Contact the VA: If the lender refuses to cooperate, the VA can step in. Call their regional loan center for assistance.
Below are a couple of scenarios where veterans identified and successfully disputed non-allowable fees:
- Case Study A: An active-duty service member noticed a $250 “notary fee” on their Closing Disclosure. After informing the lender that notary fees are non-allowable, the lender promptly removed it.
- Case Study B: A retired veteran found a $200 “escrow handling fee” on their Loan Estimate. After questioning it, the lender absorbed the cost, citing an “administrative error.”
11. Legal & Regulatory Framework
The primary source governing VA loans is the VA Lenders Handbook (VA Pamphlet 26-7). Various VA Circulars—such as Circular 26-14-10—also clarify fee restrictions. Lenders who fail to comply risk losing their VA approval. If you feel you’re being overcharged, referencing these official documents can help you build a strong case when disputing charges.
12. Why Work with VA-Savvy Professionals?
One of the best ways to ensure a smooth transaction and avoid non-allowable fees is to partner with a real estate agent and loan officer experienced in VA loans. These professionals understand the nuances of VA guidelines and can:
- Quickly spot prohibited fees on disclosures.
- Negotiate effectively for seller concessions.
- Set realistic expectations on closing costs.
- Ensure your home is a good match for VA appraisals and requirements.
13. Conclusion & Next Steps
Awareness of VA non-allowable fees is critical to maximizing the benefits of what you’ve earned through your military service. Understanding what fees not to pay, leveraging seller concessions, exploring lender credits, and staying under 1% of the origination fee, you can eliminate or reduce surprise closing costs. Perhaps most importantly, having VA-savvy pros in your corner means you have a champion looking out for you.
Actionable Steps:
- Compare multiple Loan Estimates from VA-approved lenders.
- Review your Closing Disclosure line by line.
- Negotiate seller concessions and ask about lender credits.
- Contact the VA if you suspect overcharging.
You’ve served our country—now let the VA loan program serve you by cutting unnecessary closing fees. Begin by reaching out to an experienced VA lender or mortgage broker to discuss your home-purchasing or refinance goals and secure the best available terms.
FAQs
1. What are VA non-allowable fees?
VA non-allowable fees are certain closing costs that cannot be charged to veterans, such as escrow fees, lender’s attorney fees, and application fees. These rules help protect veterans from excessive closing costs.
2. How can I dispute a non-allowable fee?
If you see a questionable fee on your Loan Estimate or Closing Disclosure, ask your lender to remove it. If they refuse, contact the VA for assistance. You can reference the VA Lenders Handbook or relevant VA circulars.
3. Do non-allowable fees apply to VA refinances?
Yes. Whether it’s a VA purchase loan, Cash-Out Refinance, or IRRRL, the same fee restrictions generally apply. However, converting to a non-VA loan removes these borrower protections.
4. Can sellers pay my closing costs?
Yes, sellers can contribute up to 4% of the home’s sale price toward your closing costs, including allowable fees like the VA funding fee. This is known as a “seller concession” and can dramatically reduce your out-of-pocket expenses.
5. What is the VA funding fee?
The VA funding fee is a one-time charge (ranging from 0.5% to 3.6% of the loan amount) required for most VA loans. It helps sustain the VA loan program and can be financed into the loan.
6. Are notary fees ever allowable?
No. Any fee for notary services is considered non-allowable. If you’re charged a notary fee on your Closing Disclosure, ask the lender to remove it.
7. Can I negotiate the origination fee?
Yes. You can shop around for lenders who may offer a reduced origination fee or provide lender credits. The fee is capped at 1% of the loan amount, but some lenders may charge less to remain competitive.
8. How do I find a VA-savvy real estate agent?
Look for agents with a Military Relocation Professional (MRP) certification or those who regularly work with veterans. Ask for referrals from fellow service members or your lender, who can often recommend experienced professionals.
