Here's Why VA Loans Could Get More Expensive

A VA loan can be an affordable way to finance a home, but soon, you could pay more to close on one.

For many prospective home buyers, not having the money for a down payment can be a huge deterrent. But for veterans of the U.S. military, VA loans make it possible to take out a mortgage without putting any money down.

VA loans are often made available at competitive rates, too. The downside is that closing costs for VA loans can be high -- especially since borrowers pay a funding fee on top of traditional closing fees. And now, closing costs for VA loans could climb even more.

Appraisal fees are rising

Getting a home appraisal is a standard part of a mortgage closing. A home appraisal confirms that a home is worth enough money to cover the loan to purchase it.

If someone is borrowing $250,000 to buy a home but that home appraises for $200,000, the lender may pull the loan offer. That's because if the borrower defaults on that mortgage, the home isn't worth enough for the lender to sell it and get repaid in full.

The cost of a home appraisal is passed on to borrowers. Now the Department of Veterans Affairs, which backs VA loans, is raising appraisal fees in some markets. These increases are due to high demand for appraisal service in certain areas. Unfortunately, those increases are apt to make VA loans more expensive.

VA loan applicants should gear up for higher costs

Changes to appraisal fees won't apply to every market. They're more likely to pop up in rural areas, so VA loan applicants in such areas may need to brace for higher costs. For example, VA appraisers will be able to charge up to $1,000 in some high-demand counties in California -- right now, those fees are set at $600 statewide.

The good news is that mortgage borrowers can usually roll their closing costs into their mortgages rather than paying them up front. So VA loan applicants who can't swing those higher appraisal fees won't necessarily have to scrounge up the cash for their closings. Rather, they can roll those higher fees into their loans and pay them off over time.

Still, VA loan applicants in some markets should be prepared to grapple with those fees.

This applies particularly to applicants in Alaska, where VA appraisal fees will be higher than anywhere else in the country.

Mortgage applicants can always explore their options outside of VA loans if they face high closing costs. But given the benefits of VA loans, like not needing a down payment, many borrowers who qualify for these mortgages may find that they're still the most cost-effective way to finance a home purchase.