Rolling closing costs into VA purchase loan

For a purchase transaction, you generally cannot add the lender’s 1% flat origination fee, reasonable discount points, title examination fees, hazard insurance premiums, or recording fees to the principal loan balance. These are considered “allowable fees” that the Veteran can pay, but they must be paid in cash at closing or covered by a seller credit. Adding these to the loan amount is only permitted for refinancing loans (IRRRLs). On a purchase, the loan amount is strictly capped at the appraised value plus the Funding Fee and energy improvements.

Yes, secondary borrowing is permitted under specific conditions. While you cannot roll closing costs into the primary VA loan, you may take out a second mortgage simultaneously to cover closing costs or a down payment required by secondary market investors. This second loan must be subordinated to the VA-guaranteed first mortgage. However, you cannot use a second mortgage to cover the difference if the purchase price exceeds the VA’s reasonable value of the property; that specific gap must be paid in cash from your own resources.

Making a down payment does not change your ability to finance the Funding Fee—you can still roll it into the loan regardless of your down payment size. However, making a down payment affects the amount of the fee you must pay. For example, a down payment of 5% or 10% significantly reduces the Funding Fee percentage for both first-time and subsequent users. While you still cannot roll other closing costs into the loan, a down payment lowers your total principal and the cost of the government fee added to your balance.

Yes. If you cannot roll closing costs into the loan and the seller is unwilling to pay them, you can use gift funds to cover these expenses. VA guidelines allow you to receive gifts from relatives or other eligible donors to pay for closing costs, down payments, or the funding fee. You must provide a gift letter stating the specific dollar amount and confirming that no repayment is expected. The lender will verify that the funds have been transferred to your account or are available at closing.

If the purchase price exceeds the property’s reasonable value (the appraised value determined by the Notice of Value), you cannot roll the difference into the loan. VA regulations prohibit the lender from guaranteeing a loan amount that exceeds the reasonable value (plus the Funding Fee). In this scenario, you must pay the difference between the sales price and the appraised value in cash at closing. This specific cost cannot be financed, nor can it be covered by a second mortgage or seller concessions, as it represents immediate negative equity.

Yes, the rules differ significantly for refinances. If you obtain an Interest Rate Reduction Refinance Loan (IRRRL), you are permitted to include all allowable closing costs, the VA Funding Fee, and up to two discount points in the new loan amount. This allows Veterans to refinance with minimal out-of-pocket expense. Similarly, for a Cash-Out Refinance, you can use the equity in your home (the cash proceeds) to pay for all closing costs and discount points, essentially rolling them into the new mortgage balance, provided you have sufficient equity.

Yes. The VA allows you to increase your loan amount to cover the cost of energy efficiency improvements, even if this pushes the total loan amount above the reasonable (appraised) value of the home. You can finance up to $6,000 for eligible improvements, such as solar heating systems, insulation, or storm windows. This acts as a “loan within a loan” to help upgrade the property. While this adds to your principal balance, it is one of the few costs other than the Funding Fee that the VA explicitly allows you to roll into the mortgage.

Since you cannot finance standard closing costs into a purchase loan, the most common strategy to avoid out-of-pocket expense is negotiating seller concessions. VA rules allow the seller to pay all of a buyer’s “customary closing costs” (such as title fees, recording fees, and the origination fee) without a limit. Additionally, the seller can offer up to 4% of the home’s value in “concessions,” which can cover things like prepaid taxes, insurance, or even paying off your judgments. This allows you to close the loan with little to no money down.

The VA Funding Fee is the primary exception to the rule against financing costs. This mandatory fee, which helps sustain the home loan program, can be added to your loan balance rather than paid in cash at closing. Almost all other standard administrative and third-party closing costs must be paid out of pocket or covered by the seller. However, there is a secondary exception: the cost of energy efficiency improvements (up to $6,000) can also be added to the loan amount above the appraised value, provided the improvements meet specific VA criteria.

Generally, no. For a standard VA purchase loan, you are not permitted to finance settlement charges or closing costs into the loan amount. VA regulations typically limit the loan amount to the reasonable value of the property (the appraised value) plus the VA Funding Fee. Therefore, expenses such as title insurance, recording fees, the lender’s origination fee, and prepaid taxes must be paid upfront at closing. This ensures the Veteran does not start the mortgage with excessive negative equity. If you cannot pay these costs in cash, you must look for other solutions like seller concessions.