So, you’re looking into VA loans? That’s great. It’s an incredible benefit earned through service. Maybe you’ve heard of the “1% rule.” What is the 1% rule on a VA loan, and how does it affect you? It simplifies certain fees, providing clarity to VA loan closing costs, and making homeownership more affordable.
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Decoding the 1% Rule on VA Loans
The 1% rule isn’t a strict rule. It’s more of a guideline limiting how much a lender can charge for originating your VA loan. Think of it as a price ceiling for certain lender fees when using your va-guaranteed loan.
How the 1% Cap Works
This cap covers the “origination fee,” which bundles the lender’s costs for processing and underwriting your veteran obtaining a loan. Lenders often offer two options.
One option is a flat 1% origination fee, equal to 1% of your total loan amount. For a $200,000 loan, the maximum fee is $2,000.
With this flat fee, your closing cost disclosure is straightforward, as certain charges become prohibited. This may also impact how you use seller concessions and what fees lenders cover. The second option involves itemized fees. The catch? These combined costs still can’t exceed 1% of your loan amount, impacting allowable fees.
This can influence the borrower pay structure and the VA maximum loan you qualify for. Explore VA loan options to discover which option yours has. You can also learn more by researching veterans affairs resources.
Non-Allowable Fees Under the 1% Rule
Certain fees are prohibited when your lender opts for the flat 1% origination fee. This protects servicemembers and veterans using their VA loan benefit by reducing initial overhead expenses when refinancing loans or buying a home. The VA revised chapter on fees clarifies allowable costs, guiding the borrower in the world of closing costs associated with VA loans.
With the flat 1% fee, certain lender overhead costs become non-allowable for the borrower to pay closing. The VA has a list of these non-allowable fees to shield military buyers from paying too much.
| Non-Allowable Fees |
|---|
| Application Fees |
| Attorney Fees |
| Rate Lock Fees |
| Appraisal Ordered by Lender/Seller |
| Escrow Fees |
| Notary Fees |
| Document Preparation Fees |
| Processing Fees |
| Underwriting Fees |
| Broker/Trustee Fees |
| Postage/Mailing Fees |
| Photocopy Fees |
| Tax Service Fees |
| Settlement/Closing Fees |
| Prepayment Penalty Costs |
| Interest Rate Lock-In Fees |
These non-allowable fees, sometimes referred to as VA non-allowable fees, can significantly impact the overall costs associated with VA loans.
VA Allowable Fees
Even with the 1% rule, you’ll still have some closing costs as a VA buyer. These allowable fees include important aspects of the home buying process, including costs va has approved, fees loan applicants need to know, appraisals lenders rely on, and fees lenders can charge.
| VA Allowable Fees |
|---|
| VA Funding Fee: Supports the VA loan program, not pocketed by the lender. |
| VA Appraisal: Assesses the property’s value, cost set by the VA. |
| Second Appraisal (If Requested by Veteran): Allows you to challenge a questionable appraisal. |
| Credit Report Fee: Helps lenders assess your financial health. |
| Title Examination/Insurance: Protects you from surprise financial claims after purchase. |
| Recording Fees/Taxes: Records legal ownership with local authorities. |
| Discount Points: Lower your interest rate, saving money long-term. |
| Hazard Insurance: Protects the home from calamities. |
| Flood Zone Determination Fee: Determines if the property is in a flood plain. |
| Surveys: Shows potential boundary disputes and encroachments. |
Construction loans also have specific guidelines, making construction loan information a key aspect of this benefit.
Who Pays for VA Non-Allowable Fees?
Lenders and agents typically handle VA non-allowable expenses. These non-allowable expenses can factor into a refinancing loan application as well. This makes navigating non-allowable fees and seller concessions for the veteran easier.
Why Does the 1% Rule Matter?
The 1% rule ensures transparency and cost predictability when buying a home with a VA-guaranteed loan, regardless of if it’s for refinancing a home. These guidelines benefit veterans seeking VA loans.
It provides a predictable measure during your journey to find that perfect home. This simplifies understanding the loan application and maximum loan processes for a veteran obtaining a mortgage.
Conclusion
What is the 1% rule on a VA loan? It’s a tool to give you a transparent and easy way to navigate home buying as a veteran. This knowledge empowers veterans to make informed home-buying decisions, considering the funding fee, allowable fees, non-allowable fees, discount points, closing costs, seller concessions, and how they relate to VA loans.
