The total amount of money needed to buy a home with a VA loan depends on several factors. Most Veterans know that VA offers 100% financing. But some assume that 100% financing means they will not need any money to buy a home. While it is definitely possible to buy a home using VA financing and not need any money to close, this needs to be planned out before the initial offer to purchase the home is made. There are closing costs and prepaid expenses that need to be paid by someone, if not by the Veteran.
Costs Involved in Purchasing a Home in Orange County, CA
The funds needed to close a VA loan are comprised of two things. Closing costs, which are one time costs having to do with the purchase of the home. The Closing costs are “non-recurring”. And Prepaid Expenses, which are also known as “recurring” expenses.
The Closing Costs include lender fees, appraisal, credit report, escrow closing costs, title report fees, recording fees to the county, and notary fees. There are also other items that can turn up depending on the property. For example, if purchasing an Orange County VA approved condo then expect a “condo transfer fee”, which is typically charged by the management company for the home owners association. The total closing costs can be anywhere from 1% to 2% of the purchase price.
Prepaid expenses include interest, property taxes, and home owners insurance.
- Prepaid interest will vary depending on the date of closing. For example, if the loan closes on June 10 then 20 days of “prepaid” interest is collected. The daily interest is calculated by multiplying the loan amount by the interest rate for the loan and dividing by 360. A $500,000 loan at 4.25% would have $59 per day of prepaid interest. So closing on the 10th would require $1,180 of prepaid interest to be collected (20 x $59). The good news is that the first payment on a loan closing on June 10 will not be until 50 days later, on August 1. The first payment will nearly always be at least 30 days after closing. A loan closing on June 30 would have no prepaid interest, but would have its first payment 31 days later on August 1.
- Property taxes. VA loans require an “impound account“, also know as an “escrow account”, for property taxes. The number of months of taxes that is deposited into the impound account is dependent upon the closing month of the loan,which in turn determines the 1st payment date. Your Orange County VA loan officer can help calculate the number of months needed as well as the total amount. The typical property tax calculation is 1.25% of the purchase price divided by 12. For example, a $500,000 purchase price x 1.25% = $6,250. $6,250 divided by 12 = $520 per month. A VA loan closing in June would require 6 months of taxes to be collected, or $3,125.
- Home Owners Insurance. A one year premium is paid at closing for the Home Owners Insurance policy. This is something the Veteran will shop for on their own, but as a quick estimate use a factor of .3% of the loan amount divided by 12. A $500,000 loan amount x .3% = $1,500. On top of the premium, three months of insurance is also deposited into the impound account. So the total estimated amount needed for the insurance is $1,875. But again, the Veteran will shop for their own insurance. .3% is just an estimate.
The prepaid’s in the examples above add up to over $6,000 on a $500,000 loan. So between closing costs and prepaid’s, expect to pay between 2% and 2.5% of the loan amount. On a $500,000 loan this means the Veteran would need between $10,000 and $12,500. But what if the Veteran wants to do a VA No No, where not only in there no down payment but also the buyer will not paying any closing costs or prepaid’s? This is where planning comes into play. Your Orange County VA mortgage lender will be able to provide a detailed estimate of the funds needed as well as help offer options for having the costs paid. The obvious solution is to negotiate to have the seller pay all the buyers closing costs and prepaid expenses. However, Orange County has been in a sellers market in 2014 which makes it difficult to get an offer accepted when the Veteran is asking for a closing costs credit. Which is why it can make more sense to look at an option where the lender issues a “credit” that will cover some or all of the closing costs and prepaid expenses. Typically there will be an upward adjustment in the interest rate, but with the benefit of not needing funds to close.
Every transaction is different. And interest rates change every day. And these are the reasons why consulting with an experienced “VA loan” mortgage originator who can provide custom loan scenarios is so important. The scenario should have a detailed breakdown of the estimated closing costs and prepaid expenses so that the Veteran is prepared before making an offer on a home.
Authored by Tim Storm, a California Mortgage Loan Officer MLO 223456 – Please contact my office at the Emery Financial. Direct line at 949-640-3102. www.OrangeCountyVALoans.com