Navigating VA Loans: Understanding the Role of Closing Costs and Appraisal Values

As a mortgage lender, I often encounter clients with a variety of questions about the home buying process. Recently, I had a VA client who inquired about the possibility of rolling closing costs into their loan. This is indeed an option, but it comes with its own set of challenges and strategic considerations

Rolling Closing Costs into the Loan: The Basics

VA loans offer a range of benefits, and yet it's possible to roll closing costs into the loan amount you need to be careful. This can make the upfront cost of buying a home more manageable for veterans. However, it's important to understand that this strategy involves more than just adding a few numbers to the loan total. In this case, you could offer more upfront and negotiate with the seller for more seller credits. But pay attention to the following:

The Appraisal Factor

One critical aspect of VA loans is the VA appraisal process.

The VA appraisal determines the market value of the property and ensures that the home meets the VA's minimum property requirements. This appraisal value plays a crucial role in how much the VA will finance.

For instance, let's consider a home listed at $275,000. If the buyer decides to roll the closing costs into the loan, the offer might be increased to $285,000, fully financed by the VA loan. However, if the VA appraisal report values the home at $275,000, the VA will only finance up to this amount. This leaves a $10,000 gap that the buyer must cover out of pocket.

The Importance of Strategic Negotiation

Given this potential scenario, it's essential to approach the negotiation process strategically. Here are a few steps to consider:

1. Educate Yourself and Your Buyer: Ensure your buyer understands the implications of rolling closing costs into the VA loan and the potential for the appraisal to come in lower than the offer.

2. Negotiate Seller Credits: Work with the seller to negotiate seller credits. This can help cover some or all of the closing costs, reducing the amount that needs to be financed or covered by the buyer if the appraisal falls short.

3. Prepare for Appraisal Contingencies: Include an appraisal contingency in the purchase agreement. This allows the buyer to renegotiate or withdraw from the deal if the appraisal comes in lower than the purchase price.

4. Have a Backup Plan: Advise your buyer to have additional funds available to cover potential shortfalls between the purchase price and the appraisal value.

While rolling closing costs into a VA loan is a viable option, it requires careful planning and negotiation. By understanding the role of the VA appraisal and preparing for potential challenges, buyers can navigate this process more effectively and avoid unexpected financial burdens.

As always, our goal is to educate and support our clients throughout the home buying journey. If you have any questions or need further assistance, don't hesitate to reach out. We're here to help you make informed decisions and achieve your homeownership dreams.