Everything You Need To Know About Closing Costs With A USDA Loan

Buying a home is an exciting milestone in life. However, it also comes with many expenses that first-time homebuyers may not anticipate. One of the biggest costs associated with purchasing a home is closing costs.

Closing costs are the fees charged to facilitate the real estate transaction. They cover expenses like appraisal fees title insurance, loan origination charges and more. Closing costs typically range from 2-5% of the total loan amount.

For example, if you get approved for a $200,000 mortgage, expect to pay around $4,000-$10,000 in closing costs. While this may seem like a daunting figure, there are ways to lower your closing costs. One strategy is utilizing a USDA loan.

In this comprehensive guide, we will dive into everything you need to know about closing costs with a USDA home loan. We’ll cover:

• What is a USDA loan?
• USDA loan eligibility
• USDA down payment and closing costs
• Itemized list of standard and USDA-specific closing costs
• Strategies to reduce your closing costs
• USDA closing cost assistance programs

Let’s get started!

What Is A USDA Loan?

USDA stands for the United States Department of Agriculture. The USDA has a mortgage loan program designed to help low-to-moderate income families in rural areas achieve homeownership.

USDA loans offer 100% financing, meaning you can buy a home with no down payment. The property just needs to be located in a USDA-designated rural zone. Surprisingly, over 97% of the country qualifies as a rural area according to USDA guidelines.

Besides no down payment, benefits of USDA loans include:

• Low interest rates
• Low monthly mortgage insurance
• Flexible credit score requirements
• No maximum income limits

USDA loans are issued through approved lenders rather than directly by the USDA. The government guarantees these mortgages, allowing private lenders to extend credit to underserved borrowers.

USDA Loan Eligibility

To qualify for a USDA mortgage, you must meet certain eligibility criteria:

• Location: The home must be in a USDA-designated rural area. Use the USDA property eligibility tool to check.

• Income: Your household income must be below the limit for your county and family size. The limit is typically 115% of the area’s median income.

• Credit score: No minimum credit score is set, but most lenders require a 620 FICO or higher. Some may approve scores as low as 580 with good factors.

• Debt-to-income ratio: Your total debt payments, including the future mortgage, should not exceed 29% of gross monthly income. Some exceptions up to 41% DTI may be allowed.

• Citizenship: At least one borrower must be a U.S. citizen or legally permanent resident.

• First-time homebuyer: The USDA program is intended for first-time buyers, but exceptions may be made if you’ve owned a home in the past few years.

• Property type: The home must be a single-family residence and your primary residence.

In addition to these requirements, you’ll need to fully document and verify your income, assets, and employment.

USDA Down Payment and Closing Costs

A huge perk of the USDA loan program is that no down payment is required. However, you will still need to pay closing costs, which can total 2-5% of the mortgage amount.

On a $250,000 home loan, your closing costs would be around $5,000-$12,500. The USDA does not require you to pay these fees out of pocket. Here are some options:

• Seller credits: The seller can credit up to 6% of the purchase price toward your closing costs.

• Lender credits: You may opt for a slightly higher rate in return for lender credits to cover costs.

• Gift funds: Relatives or nonprofit groups can legally gift you money for closing costs.

• Take a higher loan amount: If the home appraises above the sale price, you can finance 100% of the appraised value plus closing costs.

Now let’s take a detailed look at what closing costs on a USDA loan actually cover.

Itemized USDA Closing Costs

Closing costs generally fall into two categories – fees to acquire the loan and fees associated with the property.

Standard Loan-Related Closing Costs

• Origination fee – Up to 1% of the loan amount charged by the lender. Covers processing and underwriting.

• Credit report fee – Cost for the lender to pull your credit report. Usually $25-$75.

• Appraisal fee – Paid to the appraiser who values the property. Typically $400-$800.

• Title insurance – Insures the lender against claims against the property title. Expect $700-$2,000.

• Recording fees – Charged by local government to record the deed transfer. Varies by county but may be $50-$150.

USDA Loan-Specific Fees

• Guarantee fee – 1% of the loan amount. Paid upfront or rolled into the loan.

• Annual fee – 0.35% of the loan balance per year. Covers mortgage insurance.

Property-Related Closing Costs

• Homeowners insurance – Lender requires 1 year upfront. Depends on the property but may be $800-$2,000.

• Property taxes – Lender requires several months of prepaid taxes at closing. Varies based on local tax rates.

• HOA fees – If the property is part of a homeowners association you may need to prepay a few months of dues.

Inspection fees, home warranty fees, and other optional costs may also factor into your total closing expenses. Shop around with multiple lenders to find the best rates and closing costs on your USDA loan.

5 Ways To Reduce Closing Costs on a USDA Loan

Closing costs can take a big bite out of your savings when purchasing a home. Here are some tips for lowering your closing expenses with a USDA-backed mortgage:

1. Negotiate seller credits – Ask the seller to pay some of your closing costs out of their sale proceeds. Up to 6% of the purchase price is allowed.

2. Get quotes from multiple lenders – Shop around and compare total origination fees and lender credits from a few lenders.

3. Opt for a higher interest rate – You can use lender credits from a slightly higher rate to cover closing costs. Run the numbers to see if it makes sense long-term.

4. Pay discount points – Just like you can buy down the rate, you can pay discount points to reduce other fees.

5. Seek down payment assistance – Nonprofit organizations may offer closing cost grants or affordable second mortgages to USDA borrowers.

Ask your loan officer for more ways to minimize your cash outlay at closing. Being informed on the process will help you get the best deal.

USDA Closing Cost Assistance Programs

In addition to the standard techniques for lowering costs, the USDA and state housing agencies administer a few programs specifically aimed at helping with closing costs:

• USDA Rural Repair and Rehabilitation Loan/Grant Program – Offers loans and grants up to $27,500 for low-income rural homeowners to make repairs or improve accessibility. Funds can also be applied toward closing costs when purchasing a home.

• State down payment assistance programs – Many states offer down payment assistance grants, soft second loans, or mortgage tax credits that may be used for closing costs with USDA-approved lenders. Availability depends on your state.

• Nonprofit down payment assistance – Organizations like Habitat for Humanity and local housing trusts give out closing cost grants in certain areas. Terms and eligibility vary.

Talk to your loan officer to learn about programs available in your region that you may qualify for. Every little bit helps when accumulating cash for closing!

The Bottom Line

Closing costs are a reality when purchasing a home – even with a 0% down USDA loan. But forewarning is forearmed. Now that you know what fees to expect, you can better budget and shop for the most affordable loan.

Utilize every strategy possible to keep your closing costs in check. And don’t hesitate to reach out to your loan officer with any questions along the way.

The USDA home loan program provides an incredible opportunity to buy a house with no down payment. With smart planning, you can make those upfront closing costs fit your budget too. Partner with a lender who wants to see you become a successful homeowner. You’ve got this!