When purchasing a home, closing costs are the fees and expenses paid at the final step of the mortgage process. Maximum Allowable Closing Costs act as a legal or lender-imposed ceiling on certain fees to protect borrowers from excessive charges.
Why Are Maximum Allowable Closing Costs Important?
Historically, some lenders charged inflated or unclear fees near closing, complicating home purchases. To promote fairness and transparency, government-backed loan programs like those from the Department of Veterans Affairs (VA) implemented strict limits on fees lenders can charge.
VA Loans: Clear Fee Caps
For VA loans, the lender’s fees for origination, processing, and underwriting are capped at 1% of the loan amount. For example, on a $300,000 loan, the maximum these lender fees total is $3,000. This cap helps make VA loans among the most borrower-friendly mortgage options.
However, certain third-party fees — including appraisal, title insurance, recording fees, and prepaid items like taxes and insurance — are not included in this 1% cap but must still be reasonable. This distinction ensures lenders cannot overcharge on their administrative costs while borrowers pay typical market rates for services from independent providers. Learn more about the VA loan origination fee cap.
FHA and Conventional Loans: TRID Rule Protections
While FHA and conventional loans don’t have a hard fee cap like VA loans, the Consumer Financial Protection Bureau’s TRID (TILA-RESPA Integrated Disclosure) rule limits how much closing costs can increase from your Loan Estimate to the Closing Disclosure.
- Zero Tolerance Fees: Certain lender fees, such as origination charges, cannot increase at all.
- 10% Tolerance Fees: Other fees related to third-party services can only increase by up to 10% total.
This system protects borrowers from surprise fees after loan application by requiring transparent cost estimates and limiting how much costs can change. For details, see our guide on the Loan Estimate and Closing Disclosure.
Common Fees Covered and Exempt from Caps
| Fee Type | Typically Limited? | Notes |
|---|---|---|
| Loan Origination Fee | Yes | Subject to 1% cap in VA loans; zero tolerance for others |
| Underwriting/Processing | Yes | Included in VA 1% cap and zero tolerance under TRID |
| Appraisal | No | Third-party fee; must be reasonable but not capped |
| Title Insurance | No | Often shopper’s choice; not capped |
| Prepaid Taxes/Insurance | No | Not fees; prepaid costs based on local assessments |
| Discount Points | No | Optional fees to lower interest rate |
Tips to Keep Closing Costs Manageable
- Review Loan Estimate carefully: Understand every fee before committing.
- Compare lenders: Origination and other fees vary; shop around.
- Negotiate seller concessions: Sellers sometimes pay part of your closing costs.
- Ask questions: Clarifying fees with your lender or agent ensures no surprises.
FAQs
Can lenders charge more than the maximum allowable? No. Violating these caps can result in refunds or penalties under VA or TRID regulations.
Who pays fees disallowed for veterans on VA loans? Fees the VA prohibits the veteran from paying are typically covered by the seller, lender, or agents via credits.
When will I know my final closing costs? Your lender must provide a Closing Disclosure at least three business days before closing, showing the final costs.
For authoritative details, visit the Department of Veterans Affairs and Consumer Financial Protection Bureau.
