Perhaps the two greatest advantages financing a home purchase with a VA loan compared to conventional choices, is the no down payment feature and restricted closing costs the veteran can pay. The VA has established that the veteran is restricted to paying certain fees, most of them being lender fees such as underwriting, document preparation or processing charges. You’ll also be introduced to a new term as it relates to closing costs: prepaids. What are prepaids?
There are two primary types of closing costs, “prepaids and non-prepaids.” Sometimes these are also referred to as “recurring and non-recurring” fees as well. Regardless, you’ll have to factor in both types when calculating how much money might be needed at your loan closing.
Simply put, prepaids are charges that you will see again in the future. Non-recurring closing costs are one time charges that you will see on your Good Faith Estimate as well as your final settlement statement.
Non-recurring closing costs are fees associated with a one-time charge. An appraisal is a one-time charge, as is a credit report, or title insurance. Fees that you will see again are costs associated with property taxes, homeowner’s insurance and mortgage interest. They’re “recurring” because you’ll pay them each and every month while you own that property. These fees are prepaid items, or simply “prepaids.”
At your closing table, you will establish an escrow account for your taxes and insurance, typically no more than two months’ worth of payments. If monthly taxes are $150 and insurance is $75, you will need to bring no more than $425 for escrow prepaids in addition to one year’s prepaid insurance of $900. The final prepaid item is the daily, or per diem, interest charges up to the first of the following month. If you close on the 20th for example, your lender will ask for 10 days of interest which is in effect your first mortgage payment.
Prepaid charges can change based upon your interest rate, homeowner’s insurance premium, property taxes and on which day of the month you close. Get to know them. You’ll be seeing them with each and every mortgage payment.