Getting a USDA loan can be an excellent option for eligible homebuyers looking to purchase a home in a rural area with little-to-no down payment. These government-backed loans offer competitive interest rates and require no down payment. However, USDA borrowers are still responsible for paying closing costs.
As your friendly neighborhood mortgage blogger, I want to provide a comprehensive overview of what closing costs entail with a USDA loan, how much borrowers can expect to pay, and smart strategies for covering these fees so you can buy your dream home.
What Are Closing Costs?
Before we dive into the specifics around USDA loans let’s quickly review what closing costs are in the first place.
Closing costs are essentially the various fees charged to process, underwrite, and close on your mortgage. They cover all the behind-the-scenes work required to get your home loan approved and your ownership legally transferred
Closing costs fall into two main buckets:
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Loan fees – These include origination charges, application fees, underwriting costs, and more. Anything tied to the actual mortgage loan itself.
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Third-party fees – Services like appraisals, credit checks, title insurance, inspections, recording fees, etc.
Buyers will pay closing fees with any type of mortgage or real estate purchase. However, the amounts vary by loan program.
USDA Loan Closing Costs
The unique structure and backing of USDA loans means they come with specific closing costs requirements. Here’s an overview of what to expect:
Upfront Guarantee Fee
This 1% fee is charged by the USDA to provide the loan guarantee that enables lenders to offer these low-down-payment mortgages. It can either be paid at closing or rolled into your loan amount.
Annual Fee
You’ll also pay an annual mortgage insurance fee equal to around 0.35% of the loan amount. This covers the USDA’s ongoing guarantee. It’s divided into monthly payments.
Standard Loan Fees
Beyond the USDA-specific costs, you’ll pay typical loan origination, application, processing and underwriting fees to your lender. The amounts vary by lender.
Third-Party Fees
As with any mortgage, you’ll be responsible for third-party fees like the appraisal, credit check, title insurance, etc. required to close on the home.
How Much Are USDA Closing Costs?
So how much can you expect to pay in total closing costs with a USDA loan? Here are the typical ranges:
- Origination Fees – Up to 1% of the loan amount
- Third-Party Fees – 2-5% of the loan amount
- Total Closing Costs – Around 3-6% of the total loan amount
For example, on a $200,000 USDA loan, expect to pay:
- Up to $2,000 in origination fees
- $4,000 to $10,000 in third-party fees
- $6,000 to $12,000 in total closing costs
Obviously, the actual amounts depend on your specific loan, credit, and property. I always recommend shopping around with multiple lenders to find the best rates and fees for your situation. USDA loans let you buy a home with little-to-no down payment, but closing costs still need to be budgeted for.
How To Minimize USDA Closing Costs
The good news is you have options to reduce your closing costs with a USDA loan, including:
Shop Around
Compare fees across multiple lenders. Even a 0.5% difference in origination fees can equal over $1,000 on a $200k loan.
Negotiate
Ask your lender about discounts or waiving certain fees. Especially once you have a competitive offer from another lender.
Buy Down Your Rate
Pay discount points to get a lower rate, which reduces long-term interest costs.
Get A Lender Credit
Your lender can raise your rate slightly and use the extra profit to credit your closing costs.
Request A Seller Credit
Ask the sellers to chip in on closing costs by giving you a credit at closing.
Leverage Down Payment Assistance
If eligible, use DPA grants to cover the closing costs.
Tips For Paying USDA Closing Costs
As a USDA loan borrower, here are my top 3 tips for handling closing costs:
1. Save up ahead of time – Know roughly what to expect for closing costs based on the loan amount and factor that into your homebuying budget.
2. Ask the seller to chip in – An experienced real estate agent can help negotiate a seller credit.
3. Shop lenders and negotiate – Take the time to compare multiple lenders and negotiate the best fees and rates.
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How Much Are Closing Costs For A USDA Loan?
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USDA Loan Closing Costs: How to Get Them Paid For You #usdaloan
FAQ
Does USDA allow cash back at closing?
How do you calculate the USDA funding fee?
How much are closing costs in Texas with a USDA Loan?
How does an USDA Loan affect the seller?
Does a USDA loan have closing costs?
USDA loans do not include closing costs in the form of an upfront fee. However, they do carry an annual fee for mortgage insurance that is generally around 0.35% of the loan amount. This fee will be broken into 12 separate payments and included on your monthly mortgage bill.
How do you sell a house with a USDA loan?
First, the most common way is to negotiate your contract to have the home seller pay your closing cost. USDA Rural Development will permit the seller to pay up to 6% of the buyer’s USDA closing costs and prepaid escrow items. Another option is to roll your closing into your loan given the appraised value is high enough to support it.
Can you roll closing costs on top of a USDA loan?
While far less common, in some cases it might be possible to roll the closing costs on top of the loan. If the home appraises for a higher value than the purchase price, your lender could increase your loan amount to cover your closing costs. Are USDA loans hard to close?
Can you buy a home with a zero-down USDA loan?
See if you can buy a home with a zero-down USDA loan. USDA loans allow the seller to pay for up to 6% of the home price in closing costs. Six percent! That means the seller of a $200,000 home can kick in $12,000 in closing costs. In reality, you probably won’t get that much. But you might get $5,000 or so.