VA Non-Allowable Fees: A Guide for Veterans and Service Members

VA non-allowable fees are closing costs that veterans and service members cannot pay when obtaining a VA loan. The Department of Veterans Affairs created these restrictions to protect military families from paying unnecessary or excessive fees.

Allowable fees are costs that veterans pay directly and include expenses like the VA funding fee, appraisal and credit report charges, title insurance and examination, recording fees, and loan origination fees up to 1% of the loan amount. These costs relate directly to securing and processing the loan.

Non-allowable fees must be paid by another party, typically the seller, builder, or lender. Common non-allowable fees include attorney fees (with state-specific exceptions), home inspection costs, real estate commissions, escrow or settlement fees, and document preparation charges. The VA prohibits veterans from paying these costs to ensure they only cover essential loan-related expenses.

VA loan fees come from different sources during the homebuying process. Lenders, title companies, and service providers all contribute to setting these costs based on their services and local market conditions.

The VA doesn’t set most fee amounts directly. Instead, the department determines which fees veterans can pay and which ones they cannot. Lenders must follow these restrictions or face penalties for non-compliance.

Fee amounts typically depend on your loan amount, local market rates, the specific services required for your transaction, and state or county requirements. Recording fees vary by county/parish. In some Louisiana parishes, recording a mortgage might cost $150, while in others it could be $200. These differences are normal and depend on local government fee schedules.

Veterans are responsible for several essential loan-related costs. The VA funding fee, typically 2.15% for first-time users with zero down payment, can be reduced or waived for disabled veterans. Appraisal costs generally range from $500 to $800 depending on location, while credit reports typically cost $30 to $50. Additional allowable fees include title search and insurance, recording fees for official mortgage documentation, origination fees up to 1% of the loan amount, and prepaid items such as property taxes, homeowners insurance, and mortgage interest.

Several closing costs must be covered by the seller, builder, or lender. Attorney fees are non-allowable unless required by state law and for the veteran’s representation specifically. Real estate agent commissions, both for the buyer’s and seller’s agents, cannot be paid by veterans. Other non-allowable fees include document preparation charges, escrow or settlement fees, notary fees beyond what’s included in settlement, general property inspections, and tax service fees for payment monitoring.

Jessica completed six years of active duty in the Navy before settling in Pensacola, Florida, where she now works as a healthcare administrator. She’s buying a $290,000 home and using her VA loan benefit for the first time.

Jessica’s Closing Costs (Allowable Fees): The VA funding fee on her $290,000 loan is $6,235 (2.15%), which she rolls into her loan rather than paying upfront. Her additional allowable fees total $8,240 and include appraisal ($675), credit report ($45), title insurance and search ($1,850), recording fees ($220), loan origination fee ($2,900, which is 1% of her loan), and prepaid expenses for taxes and insurance ($2,550).

Fees Paid by Others (Non-Allowable): The seller pays $17,400 in real estate commissions for both agents (6% of purchase price), a $575 escrow fee, $325 for document preparation, and a $450 home inspection that Jessica requested. The lender covers a $195 tax service fee. Total non-allowable fees: $18,945.

Jessica’s Savings: VA regulations protect Jessica from paying nearly $19,000 in closing costs. Because she has a 10% service-connected disability rating, her VA funding fee is completely waived, saving her an additional $6,235. Combined, these benefits reduce her closing costs by over $25,000 compared to conventional loan requirements.

Several situations involve modified rules or additional considerations regarding fee payment.

Termite inspections follow state-specific requirements. When state law mandates a termite inspection, the seller must cover the cost. Veterans can pay for optional termite inspections they choose to obtain beyond legal requirements.

Refinancing through an Interest Rate Reduction Refinance Loan, or IRRRL, operates under different fee rules than purchase transactions. Many purchase-related fees don’t apply to IRRRLs, making refinancing simpler and more affordable.

Attorney fees vary by state requirements. States that mandate attorney representation at closings allow veterans to pay their own attorney’s fees when the attorney represents their interests. The seller’s attorney fees and general document preparation costs remain non-allowable regardless of state law.

Veterans can hold multiple VA loans when selling one VA-financed home and purchasing another, though specific conditions apply. Fee rules remain consistent across both transactions.

Manufactured homes follow the same fee structure as traditional homes, though the appraisal process includes different criteria and may involve additional property-specific requirements.

VA protections limit certain fees, but closing costs still accumulate. Several approaches can reduce what you pay.

Negotiating seller concessions provides the most significant cost reduction. Sellers can contribute up to 4% of the home price toward closing costs, potentially covering all allowable fees. Sellers in buyer’s markets are particularly receptive to these arrangements. Shopping for controllable services like homeowners insurance and title companies can generate hundreds of dollars in savings.

Lender credits represent a tradeoff between upfront and long-term costs. Some lenders offer closing cost credits in exchange for slightly elevated interest rates. Analyzing the total cost over your expected loan term reveals whether this option makes financial sense.

Closing timing influences prepaid interest amounts. Month-end closings reduce prepaid interest compared to early-month closings, as you only prepay interest for the remaining days in that month.

Service providers sometimes offer military discounts. Title companies and other vendors may provide veteran-specific pricing that reduces costs. Comparing loan estimates from multiple VA-approved lenders exposes variations in origination fees and other charges, which can differ considerably across institutions.

The VA’s 1 percent rule limits lender charges to 1% of the loan amount. This restriction covers origination or processing fees, underwriting fees, and other charges the lender directly controls.

On a $250,000 loan, total lender fees cannot exceed $2,500. Third-party fees for services like appraisals, credit reports, and title work are excluded from this calculation and evaluated separately.

The 1 percent rule protects veterans from excessive lender charges. Lenders frequently charge below the maximum allowed percentage, making fee comparison valuable when selecting a lender. Veterans should review loan estimates carefully to understand the specific fees each lender charges.

Since veterans cannot pay non-allowable fees, other transaction parties must cover these costs. The distribution typically follows established market practices.

Sellers commonly pay most non-allowable fees in standard real estate transactions. This includes both agents’ commissions, escrow fees, and other restricted costs. These seller responsibilities are customary across most markets and built into standard purchase agreements.

Builders handle non-allowable fees differently. New construction sellers typically incorporate these costs into their pricing structure, understanding that VA loan rules prohibit veteran payment of certain expenses.

Lenders occasionally cover fees through lender credits, particularly in competitive lending markets where terms differentiate one lender from another. Real estate agents may contribute from their commissions toward non-allowable fees to facilitate transaction completion, though this remains voluntary.

Non-allowable fees persist as transaction costs but transfer to other parties. Sellers generally factor these expenses into pricing strategies and negotiation decisions when working with VA buyers.

Understanding the distinction between allowable and non-allowable fees helps veterans navigate the home purchase process with accurate budgeting and effective negotiation strategies. These protections ensure veterans only pay for essential loan-related costs.

DSLD Mortgage guides veterans through VA loan transactions in Louisiana, Mississippi, Alabama, Tennessee, Texas, and Northwest Florida. We can answer questions about your specific situation, explain closing costs, and help you understand your VA loan benefits.

Sources:

• U.S. Department of Veterans Affairs, VA Lender’s Handbook (VA Pamphlet 26-7)
• VA.gov, “VA-Backed Home Loans” (www.va.gov/housing-assistance/home-loans/)
• Consumer Financial Protection Bureau, “What is a VA loan?” (www.consumerfinance.gov)