Do USDA Loans Cover Closing Costs?

Closing costs can be one of the biggest obstacles for homebuyers, especially first-time buyers without a lot of cash to spare When you take out a mortgage to buy a house, you have to pay fees and charges associated with obtaining the loan and transferring ownership of the property. These closing costs typically range from 2-5% of the total loan amount

For example, if you get approved for a $200,000 mortgage, you may have to shell out anywhere from $4,000 to $10,000 just to close on the loan. That’s a lot of money upfront!

Thankfully, there are affordable mortgage programs like USDA loans that make buying a home more accessible by covering your closing costs In this article, we’ll explain

What are closing costs?
Do USDA loans pay closing costs?
What closing costs are covered by USDA loans?
Strategies to reduce closing costs with a USDA loan

What Are Closing Costs?

Closing costs refer to the fees charged to process, underwrite, and close on a mortgage loan. They include charges from the lender as well as third parties like appraisers and the local government.

Typical closing costs on a mortgage loan include:

Origination fee – 1% of the loan amount, charged by the lender to process the loan
Appraisal fee – $400-$600 to assess the property’s value
Credit report fee – $50-$100 to check your credit history
Title insurance fee – $700-$2000 to insure the property title
Recording fees – $100-$200 to file your deed with the local government
Taxes and insurance – 1-2 months of prepaid property taxes and homeowners insurance

Closing costs vary by lender, loan program, and location. On a conventional loan, the buyer typically covers all closing costs out-of-pocket. We’ll explain shortly how USDA loans are different.

Do USDA Loans Pay Closing Costs?

The short answer is yes! One of the best perks of USDA loans is that they allow you to finance 100% of your closing costs directly into the mortgage.

This means you can buy a home with absolutely no money out of pocket for downpayment or closing costs, making USDA loans one of the most affordable mortgage options for low-to-moderate income borrowers.

What Closing Costs Are Covered by USDA Loans?

USDA loans let you roll all typical closing costs into the mortgage loan, including:

Origination and application fees
Appraisal and credit report fees
Title insurance premiums
Recording charges
Initial escrow payments for property taxes and insurance

The only closing costs you can’t finance with a USDA loan are prepaid items like homeowner’s insurance, property taxes, and per-diem interest. You’ll need to pay those costs upfront.

Additionally, USDA loans charge an upfront guarantee fee of 1% of the loan amount and an annual fee of 0.35%. These USDA-specific fees can also be rolled into the mortgage loan.

In total, you can finance over 100% of the home’s purchase price with a USDA loan to cover all closing costs and fees.

Here’s an example of closing costs included with a $200,000 USDA loan:

Loan amount: $200,000
Origination fee: $2,000 (1% of loan amount)
Appraisal fee: $500
Credit report fee: $50
Title insurance premium: $1,000
Recording fees: $200
Initial escrow payments: $2,000
USDA guarantee fee: $2,000 (1% of $200,000)
Total closing costs: $7,750

Since all fees except prepaid items can be financed, the total USDA loan amount would be $207,750 – exceeding the purchase price by $7,750 to cover all closing costs.

Strategies to Reduce Closing Costs on a USDA Loan

While USDA loans allow you to roll closing costs into the loan balance, a higher loan amount means higher monthly payments. Here are some tips to lower your closing costs:

Shop around: Compare quotes from multiple lenders. Closing costs can vary dramatically.
Seek lender credits: Ask your lender for a credit toward closing costs in exchange for a slightly higher rate.
Request seller concessions: Sellers can contribute up to 6% of the purchase price toward the buyer’s closing costs.
Pay discount points: Buying discount points reduces your interest rate, lowering monthly payments.
Bring cash to closing: Paying even 1% of closing costs out-of-pocket makes a difference.
Check for grants: There are state and local downpayment assistance grants for USDA borrowers.

The Bottom Line

Thanks to its flexible financing options, USDA home loans offer a clear path to homeownership by covering 100% of your closing costs and downpayment.

If you’re a low-to-moderate income borrower struggling to come up with cash to close, a USDA mortgage allows you to buy a home now with no money down and rolled closing costs. Lower monthly payments and easier qualification requirements make USDA loans one of the most affordable mortgage programs today.

What do USDA loan closing costs cover?

When you purchase a new home with a USDA loan, you will be responsible for a number of fees at closing.

Some of these closing costs are faced by all borrowers and first-time home buyers who are in the process of qualifying for a mortgage loan.

However, your approved USDA lender will also charge fees specific to the USDA rural development loan program.

Furthermore, USDA loan closing costs can vary by provider.

Whether you’re refinancing your current USDA loan or securing a purchase loan, some expenses are required whenever you submit a loan application.

Below are common fees that you can expect to see included in your closing costs.

Typically, 0-1% of the loan amount. Your lender will charge an origination fee to process and underwrite your loan application.

“Some lenders have a flat fee, while others have percentages,” says Jon Meyer, The Mortgage Reports loan expert and licensed MLO. “You can ask your lender if there is any wiggle room.”

Sometimes called loan application fees or processing fees, your Loan Estimate will reveal various in-house fees that are specific to your mortgage lender.

The good news is that sometimes underwriting fees, and many other closing costs, can often be negotiated. So speak with your loan officer about rebates and discounts.

A home appraisal is generally part of the loan application process — though there are exceptions.

A professional appraiser will establish the value of the property, based on an inspection of the home, local real estate market conditions, and comparable sale prices in your new home’s area.

Essentially, the appraisal fee covers the expense of verifying the property’s fair market value to ensure it matches the home’s purchase price.

This fee covers the cost of pulling your credit reports from the major credit reporting bureaus to establish your credit score.

Also known as mortgage points, discount points are an optional closing cost. When you buy, or pay, discount points at closing, you are basically paying money upfront to lower your loan’s interest rate.

Some borrowers use discount points as a strategy to reduce their monthly payments, which can save a substantial amount of money over the life of the loan.

Although, your specific savings will depend on how long you plan on living in the home before you sell or refinance.

Title insurance protects your mortgage lender against claims or liens against your new home’s title.

As a home buyer, you may pay this fee as part of your closing costs, but sometimes the seller will absorb the cost of title insurance on behalf of the buyer.

This fee is paid to the escrow or title company to set up an escrow account that will hold your earnest money and other funds that may pass between you and the seller.

The recording fee covers the expense to have your local government agency, often the County Recorder’s Office, update public recorders with new ownership details.

Costs specific to the property

Certain expenses are required any time you own a home. When you get a mortgage, the lender will require that you prepay a certain number of months of these expenses.

They do this to ensure that your new home is not in jeopardy of being seized by the government, in the case of unpaid taxes, or at risk of being destroyed with no insurance.

Property taxes: typically around 1% of the property value per year
Homeowners insurance: $500-$1,000+ per year, depending on home value

The lender will typically require a few months’ worth of both property taxes and homeowners insurance to be paid upfront at closing. These are put into an “impound account” and paid out to the insurance company and tax authority by your lender when due.

Although the amount of upfront taxes and insurance varies by state, typical prepayment amounts might range from:

4-8 months of property taxes
12-14 months of homeowner’s insurance premiums

For instance, your home value is $200,000 and your property taxes are 1% per year. Plus, your homeowner’s insurance premium is $600 per year. The lender would collect approximately:

$1,000 in prepaid taxes (6 months)
$700 in prepaid insurance (14 months)

After collecting the fees, the lender sends payment to the county tax office and your insurance company. They handle these payments to ensure the items are paid in full.

Expenses like a home inspection and home warranty are a good idea, but not required or collected by the lender.

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

FAQ

Does USDA allow cash back at closing?

USDA refinance transactions are not “cash” out opportunities for debt reduction, money out for repairs, etc. Cash back at loan closing on a refinance it typically very low, and is the result of final escrow calculations and adjustments.

How does an USDA Loan affect the seller?

Reducing Closing Costs with Seller Concessions In addition, they can contribute up to 6 percent of the loan amount in what are known as “concessions” to cover expenses like prepaid taxes and insurance. Depending on your situation, a seller might be able to cover all of your upfront USDA loan costs.

How much are closing costs in Texas with a USDA Loan?

Generally speaking, for a new home purchase in Texas, the buyer can expect to pay around 4.5% (of the purchase price) for closing costs and prepaid escrow requirements. Escrow requirements include prepaid taxes and home insurance.

Do USDA loans have origination fees?

USDA Loan-Related Costs 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 one’s for processing and administering your loan. Estimated cost: $500 to $1,000.

Do you have to pay USDA mortgage closing costs?

The good news is that you don’t have to pay USDA mortgage closing costs out of your own pocket. A little-known USDA guideline says you can take a bigger loan amount to pay for closing costs, if the appraised value is higher than the purchase price. For instance: Other ways to pay closing costs are as follows.

How much does a USDA home loan cost?

USDA closing costs are generally on par with other major loan programs: about 2-5% of the home loan amount on average. On a $300,000 USDA home loan, you might pay around $6,000 to $10,000 in closing costs. Of course, these can vary a lot by lender and location.

Can you buy a home with a USDA loan?

Here’s a better way to cover USDA loan closing costs. 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.

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?

What are the different types of USDA home 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.

Can you get a gift to cover USDA loan closing costs?

You can receive a gift from a relative or even a charitable organization to cover USDA loan closing costs. Rather than getting a wedding gift or other high-cost item from family, request a financial gift toward your closing costs. Seller credit When the seller has a hard time selling the home, they may offer incentives like a seller credit.