Can You Include Closing Costs in a USDA Loan? What Borrowers Need to Know

Millions of Americans have benefitted from the low cost perks of the USDA home loan program. USDA home loans are zero-down, and come with some of the lowest average interest rates in the market. Still, it’s important to thoroughly review the costs of any home loan so you know what to expect on closing day.

Generally, USDA loan closing costs run between 3% to 6% of the home’s purchase price. The total cost of the loan and cash needed at closing can vary widely from one borrower to the next depending on your credit, the lender and the property. Working with an experienced USDA lender can help you to avoid surprises.

Here’s what you need to know about the potential closing costs you might expect with your USDA loan:

For many homebuyers coming up with cash for closing costs can be a dealbreaker. That’s why one of the most common questions about USDA loans is “Can closing costs be included?” The answer is yes—with some limitations. Here’s what borrowers need to know about rolling closing costs into a USDA mortgage.

What Are Closing Costs on a USDA Loan?

Closing costs are the fees charged to finalize and fund your mortgage They include

Origination and underwriting fees charged by the lender to process your loan application.
Title search and insurance to ensure the property has clear title.
Appraisal and credit report fees paid to third-parties.
Prepaid taxes, insurance premiums, and interest.

On a $200,000 USDA loan, estimated closing costs range from $6,000 to $12,000. Exact costs depend on your lender, credit, and property location.

Can You Include Closing Costs in Your USDA Loan Amount?

Unlike most mortgages, it is possible to finance your closing costs into a USDA loan. However, there are limitations:

Your loan amount cannot exceed 100% of the home’s appraised value.
The home must appraise for more than the purchase price to cover closing costs.
High closing costs may limit the amount you can roll in.
Not all lenders allow this option.

So you either need equity in the home or a lender willing to stretch your loan amount to the max. It’s easier with a low purchase price relative to the appraisal.

Other Ways to Cover Closing Costs

If you can’t roll costs into your USDA loan, here are some alternatives:

Negotiate a seller credit – Ask the seller to pay 3-6% of purchase price toward closing.
Use gift funds – Get help from family, employer, or nonprofit downpayment aid.
Take a higher interest rate – Get lender credits in exchange for slightly higher rate.
Pay out of pocket – Use your own savings, but have funds verified.

Shopping lenders and negotiating with sellers can help reduce your out-of-pocket costs.

What Is Required for Closing on a USDA Loan?

At a minimum, you’ll need to pay for:

Earnest money deposit (1-2% of purchase price)
Portion of prepaid taxes not covered by loan or seller credits
First year’s home insurance premium if not financed
Any closing costs not covered by the loan or seller

Plan for $2,500 to $5,000 in cash needed to close, not counting your down payment. Work with your lender to estimate precise costs for your situation.

Steps to Take Before Closing on Your USDA Loan

To ensure a smooth closing, be sure to:

Get a solid pre-approval – Confirm you qualify for the maximum financing.
Compare multiple lender quotes – Shop around for the best rates and fees.
Verify gift funds if needed – Have donor provide proof of transfer.
Confirm your rate lock – Lock your rate once under contract.
Request the CD 3 days before closing – Review closing figures beforehand.
Arrange financing of closing costs if possible – Discuss options with lender.
Gather required funds – Have a cashier’s check for any out-of-pocket costs.

The Bottom Line on USDA Closing Costs

While you can potentially include closing costs in your USDA loan amount, it is contingent on the appraisal. Work with a trusted lender to run the numbers and explore all your options for covering costs. With the right preparation and financing strategy, you can keep out-of-pocket expenses to a minimum at closing.

can closing costs be included in usda loan

USDA Loan Closing Cost FAQs

Have a question we didn’t answer here? Ask a Neighbors Bank USDA loan specialist today! We’re happy to answer any questions you have throughout the process!

Two Types of USDA Loan Closing Costs

With USDA loans, your closing costs will fall into one of two categories: your mortgage and title-related fees and the expenses associated with your property.

Let’s look at both types of USDA home loan closing costs more in-depth.

First up are your loan and title costs. These vary depending on your mortgage lender, credit score, location, and purchase price, but here’s a look at some fees you may owe:

Origination fee: This is charged by your lender for originating the loan. Estimated cost: 1% of your loan amount
Processing/underwriting fee: Another lender-side fee, this ones for processing and administering your loan. Estimated cost: $500 to $1,000
Credit report: To assess your risk as a borrower, your lender will pull your credit report when you apply for the loan. Estimated cost: Up to $100 per application
Discount points: You might opt to buy “points” to lower your interest rate. Estimated cost: 1% of your loan amount
Appraisal fee: Your lender will require your home’s value to be appraised before approving your loan. Estimated cost: $600 to $750
Title search: This is a deep dive into the property’s title to ensure there are no legal or ownership issues outstanding. Estimated cost: $500 to $1,000
Prepaid interest: You’ll need to pay interest on your loan for each day between your closing date and the end of the month. Estimated cost: Depends on your interest rate and loan amount

There may be other fees too, so make sure your lender breaks down your estimated costs after you are under contract on a home. At Neighbors Bank, we may not charge for all the fees you see above, and were happy explain any closing costs before your closing appointment.

USDA Loan Closing Costs: How to Get Them Paid For You #usdaloan

FAQ

Are closing costs factored into the loan?

Yes, closing costs can be included in a mortgage loan. This is also known as “rolling” closing costs into a loan. The downside of rolling closing costs into a loan is that you will be paying interest on the closing fees, so you’ll pay more for your mortgage in the long run.

What is the maximum debt to income ratio for a USDA loan?

USDA Loan Approval The standard debt to income (DTI) ratios for the USDA home loan are 29%/41% of the gross monthly income of the applicants. The maximum DTI on a USDA loan is 34%/46% of the gross monthly income. USDA will allow these DTI ratios with compensating factors.

Does a loan estimate include closing costs?

The form provides you with important information, including the estimated interest rate, monthly payment, and total closing costs for the loan. The Loan Estimate also gives you information about the estimated costs of taxes and insurance, and how the interest rate and payments may change in the future.

Does USDA charge a fee or fees for their loans?

The annual fee is equal to 0.35% of the loan amount. If you have trouble calculating your USDA guarantee fee, look into using a USDA guarantee fee calculator, which can be of great assistance.