Since their ubiquity during the mid to late 90’s, VA loans were relatively unknown and a definitive niche for a few Real Estate Professionals. Since the beginning of 2007, VA and FHA loans have become the backbone of our current real estate market. Without them there would be no pavement on this “road to recovery”. That said, there is a lot of misunderstanding surrounding the VA requirements, specifically what are the truly “allowable fees” and who can pay them. True to my no-nonsense and easily digestible approach I will attempt to demystify the “allowable” and “non-allowable” fees-leaving you with the important knowledge.
Firstly, the Department of Veterans Affairs defines allowable charges as “fees that the veteran borrower can pay or closing costs that may be charged to the borrower, as are determined by the local VA Office as “customary and reasonable””. Here’s the first important note; these “determined” costs are subjective to locality (i.e. Regionally defined. CA is going to be different than VA). This should shed some light as to why certain lenders categorize a fee “allowable” when others may not. The VA does provide lending guidelines which do their best to generalize the fee names and categories however due to regional differences they don’t cover them all.
After escrow is opened, the Mortgage Broker or Lender will send a request to your Escrow Company, such as Sunset One Escrow, who will, in turn, provide the lender with an estimated HUD. At this point the introduction to “non-allowable/allowable” fees is made between the Buyer, Mortgage Broker or Lender and the Buyer’s Real Estate Agent. A VA loan is a normal Mortgage/Purchase Money Loan which is backed by the full faith and credit of the United States Government. Because it is tied to Government money federal bureaucrats decided that the Borrower would only be required to pay certain fees-any fees in addition to those allowable would have to be paid by someone else. (Boy, doesn’t that sound a little too familiar in these times).
Moreover, the rules become a little more complicated if the loan is being originated by a Mortgage Broker and not a direct lender. For example, if the Mortgage Broker is charging an “Origination Fee”, the Mortgage Broker is required to credit the Buyer/Borrower for all non-allowable fees.
For most transactions this isn’t the case-But, if the Seller has been unaware of the Buyer’s decided financing option and all of its ramifications, rest assured that it will be made here. It will need to be settled as to which party will absorb the burden of the non-allowable fees.
Here are some common questions regarding VA Financing and the issue of costs;
What are the VA non-allowable fees? Here is a brief list of the most common “non-allowable” fees;
Document preparation, loan closing or settlement(escrow), attorney services for anything other than title work, preparing loan papers for conveyance fees, locking in interest rate services, photographs, stationery, mailing or postage charges, telephone calls, amortization schedules, general overhead, membership, escrow charges or fees, document preparation and / or assignment, notary, loan application, processing, loan broker or finder’s fee other than your mortgage company, trustee’s fees or charges and tax service.
To obtain a copy of the more complete list please click on the attachment here;VA list of fee allowability.
My Buyer’s offers aren’t being accepted because we disclose it’s a VA loan. How do I get around this problem? Some Sellers may not be willing to entertain offers where the Buyer is utilizing VA financing simply because they are aware that they will be paying the majority of the closing costs. If they’ve already reduced the Sales Price to sell the property, they may not want to give up any more money. Contrary to popular belief, the Seller has no obligation to pay the Buyer’s/Borrowers “non-allowable” costs. In fact, the Seller can decline all together or limit the amount he/she is willing to pay. The Lender cannot force the Seller to pay these items. If the Seller declines or limits the amount they are willing to pay, either the Lender, Mortgage Broker or Real Estate Agents will have to cover the fees.
Does the Seller have to pay the “Non-Allowable” fees? NO. There is no requirement for the Seller to pay these costs, despite what the lender may say. As long as a party to the transaction, other than the Buyer, pays the costs, the loan remains in compliance.
Well, what if the Lender is telling my Seller/Buyer that these fees HAVE TO SHOW ON THE SELLER SIDE, or else they can’t fund the loan? Sometimes the Lender will require that the “non-allowable fees” be shown on the Seller side of the HUD. However, recent changes have allowed for more flexibility in this area. With the introduction of “Paid Outside of Closing (POC)” items several years ago, many an Escrow Officer has been relieved to discover a redress for this particular issue. If you’re in a position where the Seller will not pay the costs, a common remedy is the credit to the Seller from the Mortgage Broker or Real Estate Agent to offset the charge(s) which will show.
If the Seller is giving the Buyer a credit why do they need to show the charges on the Seller side? Up until the revisions made in 2010, this was a very real problem. The most common solution was to reduce the credit by the amount of the fee total. In most cases the Seller was actually crediting more than they agreed to because of the Lenders mandate. Recently, VA has amended their policy to allow lump sum credits which effectively ends this problem.
What are all of these charges noted as “POC”? Why do they show on my Buyer’s closing statement? A Paid Outside of Closing (POC) notation means that the fee may/may not have been charged to the account of the Buyer but was paid by another party or by the Buyer directly. Simply, the Buyer did not pay the fee through the loan funding. The use of POC’s allows the Escrow Company and the Lender to accurately track all of the fees in connection with the loan.
Since VA loans deal with the potential of affecting your commission, it pays to be informed and prepared when taking on a VA approved Buyer.
I’ll do my part to keep you informed as things roll along. Cheers to the prosperity of your business this year and next!