VA Loan Occupancy Requirements and Closing Costs
Since its conception, The Veteran Affairs (VA) home loan benefit has enabled millions of service members, veterans, and military families to realize their homeownership dreams.
Through the program, qualified lenders supply home financing to allow you to purchase property without down payments, without private mortgage insurance (PMI), with looser credit requirements and limited closing costs.
Among the most important considerations regarding a VA loan are occupancy requirements and closing costs. Understanding the occupancy requirements and closing costs detailed herein will help you know what to anticipate during the VA loan process.
VA Home Loan Occupancy Requirements
VA loans are granted for primary residences. As a borrower, you are expected to reside in the property you purchase. The VA formulated occupancy requirements to ensure homeownership is the intended purpose of the borrower. The occupancy requirements essentially rule your ability to buy a vacation home or investment property. The occupancy issue is crucial and can be confusing, especially if you are a first-time homebuyer.
If you secure a VA home loan, you have to certify your intention to occupy the property as your primary residence. Typically, homebuyers have 60 days from closing the purchase to occupy the property purchased using a VA loan. The VA considers this duration a “reasonable time” to occupy the residence after closing the loan.
However, there are some instances where the VA will allow you to go past the 60-day point, potentially extending up to 12 months. The 60-day requirement may not be enough for some homebuyers. In such cases, occupancy can occur beyond two months but not later than one year after closing. Below are some common cases where an extension may be permissible:
Preparing to Separate from Service
If you have plans to retire within a year after applying for a VA home loan, you can be granted an extension to move in at a later date. As a retiring veteran, you must include your retirement application copy, and the VA lenders will consider if your income can maintain the home loan.
Intermittent occupancy can apply if you are a single civilian working overseas. The VA allows intermittent occupancy due to employment, so long as you show continuous residence for most of the year and there isn't any indication of having established residence elsewhere. VA loan occupation requirements do not allow using the home as a seasonal vacation home.
Spouses and Occupancy
The VA allows your spouse to meet the occupancy requirements if you are active-duty military personnel on deployment or unable to reside at the property within a reasonable timeline. There are some unique scenarios where your spouse, if you are a veteran, can fulfill the VA loan occupancy requirements if employment situations make reasonable property occupancy difficult.
Property Undergoing Repairs or Improvements
Suppose you have agreed with your lender to repair or improve the residential property to meet Minimum Property Requirements (MPRs). In that case, the VA can allow occupation after the repairs and improvements have been completed. However, the VA requires that you certify your intent to occupy the home when the repairs and improvements are made.
Occupancy cases will be different, so the policies and requirements among lenders may be different. It's important to notify your loan officer if you think you may have challenges occupying the home within the stipulated duration.
VA Loan Closing Costs
Just like every mortgage, VA loans also come with closing costs and related expenses, sometimes referred to as "settlement charges." One of the benefits of the VA loan program is that it helps curb closing costs, thus helping you save money. Closing costs are inescapable, but VA limits the costs and fees veterans and service members can incur at the time of closing.
As a homebuyer, you can request the seller to pay the VA loan closing costs and up to 4% of the purchase price for aspects(concessions)such as insurance, prepaid taxes, judgment, and collections. Below is an overview of the VA loan-related closing costs:
1. Origination Charge
Lenders can charge up to 1% of the home loan amount to cover the origination, underwriting, and processing costs. The lenders can charge a flat 1 % original fee or select various fees, as long as the fees don't exceed the 1%.
As a VA home buyer, you are excluded from paying certain fees that lenders may charge, including document fees, escrow fees, non-title-related attorney fees, mortgage broker fees, postage fees, and termite inspection fees.
2. Appraisal Fee
As a VA buyer, you are required to get an appraisal. The property's location and other factors will determine the appraising fees, which the VA sets and not the lender. You are required to pay the appraisal fee upfront.
3. Title Charges
Before purchasing a home, veterans and service members are required to have a "clear title." This means there aren't any liens, property disputes, or legal defects on the property you want to purchase.
To protect their interests in the property, lenders require the purchase of their title insurance. Title insurance prices vary. It is advisable to pay the one-time owner's title insurance fee.
4. Discount Points
It's possible to lower your loan interest rate by paying "points." One point is the equivalent of 1% of the VA loan amount. You are essentially purchasing a lower interest rate through an upfront payment.
5. Credit Report Fee
Some lenders may require you to incur the cost of accessing your credit information. According to the VA, the credit report fee shouldn’t exceed $50.
Non-Loan Closing Costs
You may incur some closing costs that are not directly related to obtaining a VA home loan. Below is an overview of some of these costs:
Property Taxes and Homeowners Insurance Prepayment - You are required to prepay your property taxes and homeowner’s insurance. The local municipality levies the property taxes annually. A part of these bills will be due at closing.
Daily Interest Charges - Monthly mortgage payments cover the past month lived in the property since the mortgage is paid in arrears. Based on a per-day rate, lenders collect prepaid interest between the closing date and the end of the closing month.
Homeowners Association Fees - If the property is in a homeowner’s association, you may incur associated closing fees. HOAs usually charge annual fees that you’ll have to consider at closing.
- Recording Fees - You will incur a fee to record your deed and other mortgage-related documents as charged by local and state governments.
The VA Funding Fee
As a VA buyer, you are subject to the VA Funding Fee, whose proceeds help cover loan default losses. The VA Funding fee represents the only VA loan closing cost that you can truly roll up on top of the loan.
You can pay this fee upfront at closing. However, many veterans opt to finance the fee, spreading it over the loan term. The VA Funding Fee varies depending on the down payment, your VA loan history, and the nature of your military service.
What You Need to Know About the Loan Estimate
Lenders can only provide a rough estimate of the VA home loan amount until they obtain the property address. Lenders are required to send you a Loan Estimate once they receive your complete application, including your credit, income, and property address. The Loan Estimate includes a close look at the loan specifics, including amount, interest rate, monthly principal, and interest payments.
The document also includes a breakdown of estimated loan and non-loan-related closing costs, the amount of cash necessary to close, the projected monthly loan payments, information regarding borrowing costs and annual percentage rate, and information regarding an appraisal, loan servicing, and assumptions.
Overall, the VA program offers significant benefits that enable homebuying for numerous veterans who may not otherwise qualify. VA home loans are among the most powerful mortgage options if you are an active military member, veteran, or surviving spouse.
If you decide to purchase your dream home through this channel, there are essential aspects to consider and things to do when making an offer. These include conducting due diligence, considering seller motivation, doing comparative market analysis, starting negotiation at the right price, including earnest money, and protecting yourself with contingencies.