While VA loans offer tremendous advantages like zero down payment and no private mortgage insurance, they still come with closing expenses. What many Veterans don't realize is that Texas, Arizona and California have unique rules and requirements that can impact your final costs at the closing table.

State-specific regulations in California, Texas, and Arizona add layers of complexity that can catch unprepared buyers off guard. From Texas's constitutional restrictions on cash-out refinances to California's variable documentary transfer taxes and Arizona's termite inspection requirements, these exceptions deserve your attention before you sign on the dotted line.

Understanding Standard VA Loan Closing Costs

Before diving into state-specific exceptions, you need to know what closing costs apply to all VA loans nationwide. The VA strictly regulates which fees Veterans can and cannot pay, protecting borrowers from excessive charges while still allowing necessary costs for processing and securing the loan.

What Veterans Can Pay

Veterans can pay for VA appraisal fees, credit report fees, title insurance and title examination fees, recording fees, hazard insurance premiums, and the VA funding fee. 

Lenders may charge either a flat one-percent origination fee OR itemized lender fees, but not both. This cap prevents lenders from stacking excessive charges and makes it easier to compare loan offers from multiple lenders.

What Veterans Cannot Pay

The VA prohibits Veterans from paying certain fees that other loan programs typically allow. Veterans cannot pay:

  • Attorney fees except for title examination work
  • Certain settlement or closing fees
  • Loan application or processing fees if a one-percent origination fee is charged
  • Document preparation fees. 

The lender must absorb these costs as part of their business operations.

The VA Funding Fee

This one-time payment helps offset the cost of the VA loan program for taxpayers. For first-time users with no down payment, the funding fee is 2.15% of the loan amount for purchase loans. The percentage decreases with larger down payments and varies for subsequent use of the VA loan benefit. 

Veterans receiving VA disability compensation, those eligible for disability compensation, and surviving spouses are exempt from this fee entirely. You can finance the VA funding fee into your loan amount, spreading the cost over the life of your mortgage.

Texas VA Loan Exceptions: The Cash-Out Refinance Restriction

Texas has the most restrictive state-level exception for VA borrowers. If you purchased a home with a VA loan in Texas, you cannot use a VA cash-out refinance to access your home equity. The state's constitutional homestead protections, designed to prevent homeowners from over-leveraging their properties, make this valuable VA loan feature inaccessible in Texas.

The Texas Section 50(a)(6) Problem

Under Article XVI, Section 50(a)(6) of the Texas Constitution, cash-out refinance loans must meet state requirements that fundamentally conflict with VA loan guarantees. Texas law only permits cash-out refinancing through conventional mortgages, which means Veterans with VA loans in Texas cannot use a VA cash-out refinance to access their home equity.

If you purchased a home in Texas with a VA loan and later want to tap into your equity through a cash-out refinance, you'll need to refinance into a conventional mortgage. This means you'll lose the benefits of your VA loan and likely need to meet different qualification standards.

Texas-Specific Closing Cost Rules

Texas imposes unique closing cost limitations for all Section 50(a)(6) loans. The state caps closing costs at 2% of the loan amount. This 2% cap includes lender-charged fees such as origination, underwriting, and credit report fees, but excludes several third-party costs according to the same regulations:

  • Appraisal fees performed by third-party appraisers
  • Property survey fees performed by state-licensed surveyors
  • Title insurance premiums (state base premium for mortgagee policy with endorsements)
  • Title examination report fees
  • Bona fide discount points

Texas also requires a mandatory 12-day waiting period between loan application and closing. This cooling-off period gives borrowers time to review disclosures and understand their obligations.

All borrowers and their spouses must attend closing in person at a Texas title company, lender's office, or attorney's office, as specified in Section 50(a)(6)(N) of the Texas Constitution. Most lenders do not permit use of power of attorney for Section 50(a)(6) loan closings.

Working Around Texas Restrictions

While you cannot do a VA cash-out refinance in Texas, alternative options exist. A VA Interest Rate Reduction Refinance Loan (IRRRL) is available for Texas Veterans who want to lower their interest rate or switch from an adjustable-rate to fixed-rate mortgage. 

You can also: 

  • Convert your VA loan to a conventional cash-out refinance. 
  • Get a home equity loan or line of credit as a second lien, which leaves your VA first mortgage intact while providing access to equity.

California VA Loan Exceptions: Documentary Transfer Tax Complications

California's documentary transfer tax system creates a complex web of county and city-level fees that can substantially increase closing costs depending on your property's location.

Understanding California's Transfer Tax Structure

California law establishes a baseline documentary transfer tax of $1.10 per $1,000 of property value or consideration paid. However, this is just the starting point. Counties collect $0.55 per $500, and cities can add their own transfer taxes on top of the county rate. The tax applies to the property value minus any existing liens or encumbrances remaining on the property at the time of transfer.

Charter Cities vs. General Law Cities

California's 121 charter cities have broad authority to set their own transfer tax rates, and many have done so aggressively. For example, Berkeley charges $15.00 per $1,000 of property value for the city transfer tax alone, in addition to the county's $1.10 per $1,000. 

San Francisco has no county transfer tax but charges varying city rates based on property value, with rates reaching as high as 6% for properties over $25 million. General law cities can only impose transfer taxes up to half the county rate, limiting their impact on total closing costs.

Who Pays California Transfer Taxes

In Northern California, sellers customarily pay documentary transfer taxes during the escrow process. However, this is negotiable. When sellers agree to cover a Veteran's allowable closing costs, they might include the transfer tax as part of that concession. The key is understanding that while sellers traditionally pay these taxes, there's no legal requirement preventing buyers from covering them if negotiated into the purchase agreement.

Arizona VA Loan Exceptions: Termite Inspection Requirements

Arizona's desert climate and prevalence of wood-destroying insects create inspection requirements that affect VA loan timelines and costs.

Arizona's Mandatory Termite Inspection

Arizona is one of more than 30 states where the VA requires wood-destroying insect inspections for all VA loans. The VA's Local Requirements specifically list Arizona as requiring these inspections statewide due to the moderate to heavy probability of termite infestation. These inspections must be completed before your VA loan can close, and any discovered issues must be resolved.

The NPMA-33 vs. Arizona State Form Dilemma

Arizona allows two different inspection report formats, and which one you use can dramatically affect your closing timeline. The Arizona state form requires inspectors to report on active infestations AND conditions conducive to termites.

The federal NPMA-33 form only requires reporting the presence or absence of active wood-destroying insect activity. For VA loans, using the NPMA-33 form typically creates fewer complications. 

Who Pays for Arizona Termite Inspections

Until June 2022, VA buyers couldn't pay for termite inspections in any state. The VA updated its regulations to allow all borrowers to cover these costs when the inspection is required. In Arizona, however, local custom still generally places this expense on sellers. 

Your purchase contract should specify who pays for the inspection. If termites or other wood-destroying insects are found, treatment and repairs must be completed.

Streamlining Your Arizona Inspection

Smart Arizona buyers should:

  • Request that inspectors complete the NPMA-33 federal form rather than the Arizona state form. 
  • Inform your inspector upfront that you're using a VA loan and need the federal form. 
  • Schedule your termite inspection immediately after the VA appraisal is ordered to compress your overall timeline. 
  • Build treatment and repair contingencies into your offer if you suspect prior termite activity

Navigating Seller Concessions in All Three States

Understanding seller concessions becomes crucial when dealing with state-specific closing cost exceptions. 

What Counts as Standard Closing Costs

Standard closing costs that don't count toward the 4% concession cap include origination fees, VA appraisal fees, title insurance and examination, recording fees, and pest inspection fees. Sellers can cover 100% of these expenses without any cap. 

What Counts as Concessions

The 4% concession cap applies to items that go beyond standard closing costs. These include paying off buyer debts to help with qualification, discount points for permanent interest rate buydowns, temporary buydown funds held in escrow, prepayment of taxes and insurance beyond what's due at closing, and homeowners association fees or dues. 

In California, if sellers pay documentary transfer taxes on your behalf, this typically counts as a standard seller cost rather than a concession, since sellers customarily pay these taxes.

Structuring Offers to Maximize Benefits

When making offers in California, Texas, or Arizona, work with your real estate agent to distinguish between standard costs and concessions. In competitive markets, you might offer a higher purchase price if the seller covers your standard closing costs, effectively rolling these expenses into your mortgage. 

This strategy keeps cash needed at closing to a minimum without violating VA regulations. Always get a Loan Estimate from your lender before finalizing your offer, so you know the exact amount of closing costs the seller should cover.

Common Closing Costs Across All Three States

While each state has its exceptions, many closing costs remain consistent whether you're buying in California, Texas, or Arizona.

Prepaid Expenses and Escrow Reserves

Your lender will collect prepaid property taxes, homeowners insurance premiums, and daily interest charges from your closing date to your first payment date. These prepaids don't represent fees but rather advance payments on expenses you'd owe anyway. Lenders also establish escrow accounts to hold funds for future property tax and insurance payments, requiring initial deposits to build adequate reserves. The amount varies based on your closing date, local tax cycles, insurance premiums, and your lender's escrow cushion requirements.

Title and Recording Fees

Title insurance protects both you and your lender against ownership disputes or undiscovered liens on the property. State and local governments charge recording fees to officially document your deed and mortgage, creating public records of the transaction. These fees vary by county and are based on the number of pages in the documents being recorded.

Credit Report and Appraisal Fees

Lenders must verify your credit history, and Veterans can pay the credit report fee. For automated underwriting cases, you may pay an evaluation fee instead of a credit report charge. The VA appraisal fee varies by state and property type according to VA-published fee schedules. 

Strategies for Reducing Out-of-Pocket Costs

Regardless of which state you're buying in, several strategies can help minimize your cash needed at closing.

Shop Multiple Lenders

The VA's one-percent origination cap and restrictions on itemized fees create a relatively level playing field among lenders. However, you should still obtain Loan Estimates from at least three VA-experienced lenders. Compare the total loan costs section, not just interest rates, as lenders may offer different combinations of rates and credits. 

Make sure you're comparing identical assumptions across all quotes, including the same property value, loan amount, lock period, and down payment if any.

Negotiate Seller Contributions

In many markets, sellers will cover some or all of your allowable closing costs to make their property more attractive to VA buyers. Your offer should specify which costs the seller will pay, distinguishing between standard costs and concessions to stay within the 4% cap. In slower markets, sellers may be more willing to cover substantial portions of your closing costs. In hot markets, you may need to be more strategic.

Consider Lender Credits

Lenders can offer credits toward your closing costs in exchange for accepting a slightly higher interest rate. This rate-for-credit trade-off can significantly reduce your upfront cash needs. Calculate the break-even point by determining how long it would take for the monthly payment increase to equal the closing cost savings. 

If you plan to refinance within a few years or anticipate moving, accepting lender credits might make financial sense despite the higher rate.

Time Your Closing Strategically

Closing late in the month reduces the prepaid interest you'll owe at closing since you're only paying for interest from closing to the end of that month. However, your first mortgage payment will then be due about 30 days later, so make sure you're prepared for that timeline. Coordinate with your lender and title company to schedule closing during the part of the month that best fits your financial situation.

Taking Your Next Steps

Understanding state-specific exceptions for VA loan closing costs in California, Texas, and Arizona puts you in a stronger negotiating position and helps you plan realistically for homeownership. 

  • Texas Veterans should explore IRRRL options or conventional refinancing if they need to access equity. 
  • California buyers should factor in documentary transfer taxes when evaluating different locations. 
  • Arizona purchasers should build termite inspection timelines into their closing schedules and request NPMA-33 forms to streamline the process.

Your VA loan benefit is a very powerful tool for achieving homeownership, even with these state-level variations. Read more about VA loans

FAQs

Can I roll closing costs into my VA loan?

For purchase loans, you can only finance the VA funding fee into your loan amount. All other closing costs must be paid at closing through your own funds, seller contributions, lender credits, or a combination of these sources. Refinance loan rules allow you to finance some additional costs, but this varies by loan type and state.

Why can't I do a VA cash-out refinance in Texas?

Texas Constitution Article XVI, Section 50(a)(6) restricts home equity lending to conventional mortgages only. The VA's guarantee on your loan is considered additional collateral beyond the homestead property itself, which Texas law prohibits for cash-out refinances. 

How do I know which California cities charge additional transfer taxes?

Research transfer taxes early in your home search by checking with the county recorder's office where the property is located. Your real estate agent should also know the local transfer tax rates. 

Do I need a termite inspection in Arizona even for new construction?

Yes, Arizona requires termite inspections for all VA loans regardless of whether the home is new construction or resale. However, new construction may qualify for alternative documentation such as a builder's warranty against termite damage. Your lender will determine if such documentation satisfies the VA's requirement.

Can I use my VA loan benefit again after buying a home in these states?

Absolutely. State-specific closing cost rules don't affect your ability to use your VA loan entitlement multiple times. Once you sell your California, Texas, or Arizona home or refinance out of your VA loan, you can restore your entitlement and use it again.