Veteran Payment of Seller Lien Discharge Costs

You are not allowed to be charged for attorney’s fees by the lender, though you can pay reasonable fees for title examination and title insurance. However, if specific legal work is required to clear the seller’s title—such as resolving a judgment or discharging a lien—you should not pay for this legal service. That is a cost the seller must bear to convey clear title. While you can retain independent counsel for your own representation, you cannot be charged for legal work necessary to cure the seller’s title defects.

The prohibition generally applies to fees “charged to or paid by” the Veteran. This means you cannot pay them out of pocket or finance them. The VA regulations specify exactly which fees a Veteran can pay; if a fee is not on that list (like a seller’s lien discharge fee), the Veteran cannot pay it. Paying these costs would be considered paying an unallowable fee. The goal is to prevent the Veteran from bearing costs that standard real estate practice assigns to the seller, regardless of the source of funds.

A loan to purchase property subject to unpaid delinquent taxes or prior mortgage indebtedness is generally not eligible for VA guaranty if the loan amount plus these unpaid obligations exceeds the reasonable value of the property. The VA requires the loan to be secured by a first lien. Consequently, existing liens must typically be paid off or subordinated. Since you cannot pay the penalty costs to discharge the seller’s liens, the seller must resolve these encumbrances. The transaction usually cannot close if the seller leaves valid liens on the title that you are restricted from paying.

Generally, no. While you are allowed to pay recording fees and recording taxes incident to recordation of your new loan and deed, you should not pay the recording fees for the seller’s satisfaction of mortgage. The costs associated with clearing the previous owner’s encumbrances are the responsibility of the seller. The Veteran is permitted to pay reasonable and customary amounts for itemized charges related to their own loan, but costs specifically tied to discharging the seller’s previous liens fall outside the scope of allowable fees for the borrower.

The VA Home Loan program is designed to provide a benefit to the Veteran, not the seller. The regulations regarding fees are structured to protect the Veteran’s financial interests and limit out-of-pocket expenses. By prohibiting the Veteran from paying the seller’s lien discharge costs or prepayment penalties, the VA ensures that the Veteran is not subsidizing the seller’s debts or paying for the seller’s obligation to provide a marketable title. This preserves the Veteran’s cash and loan entitlement for their own benefit, rather than alleviating the seller’s financial burdens.

No. The 1% flat charge paid to the lender is intended to cover the lender’s administrative costs and overhead that are not reimbursable as itemized fees, such as loan processing, document preparation, and notary fees. It is not a fund intended to pay third-party debts owed by the seller, such as lien discharges or prepayment penalties. The lender cannot use this fee to pay the seller’s obligations. The 1% fee is strictly for the lender’s origination activities and cannot be diverted to cure defects in the seller’s title.

Even if you sign a sales contract agreeing to pay the seller’s lien discharge fees or prepayment penalties, the lender is prohibited from allowing you to pay them under VA rules. Federal regulations governing the VA loan program take precedence over the sales contract regarding allowable fees. The lender cannot charge you for costs that are legally the seller’s responsibility to provide clear title. If such a clause exists in your contract, it generally cannot be enforced using VA loan funds, and the transaction details would likely need to be restructured.

There is a distinction between purchase and refinance transactions. If you are obtaining a “cash-out” refinance on a home you already own, you are permitted to use the loan proceeds to pay off your own existing liens, such as your current mortgage, tax liens, or judgment liens. In this scenario, satisfying these debts is necessary to establish the new VA loan as the primary first lien. However, you still cannot use the loan proceeds to pay a prepayment penalty on the existing loan you are refinancing; that specific cost cannot be financed.

You generally cannot pay to discharge the seller’s tax liens or judgments. A fundamental requirement for a VA loan is that you obtain a valid first lien on the property. This requires the seller to convey clear title. Costs associated with clearing the seller’s title defects are not included in the VA’s list of “allowable fees” for Veteran borrowers. Therefore, the seller is responsible for satisfying these debts to clear the title. If the seller cannot pay these liens, the transaction typically cannot proceed because you are restricted from paying these non-allowable charges.

No, you are strictly prohibited from paying this cost. VA regulations specify that a Veteran purchasing a property with a VA loan cannot pay penalty costs required to discharge any existing liens on the seller’s property. Even if the seller has a mortgage with a high penalty for early payoff and refuses to sell unless this cost is covered, you cannot use your VA loan proceeds to pay it. The VA aims to protect Veterans from assuming the seller’s financial obligations. The seller must pay this penalty from their own sale proceeds or personal funds.