USDA loans feature some significant benefits, especially for first-time homebuyers. The biggest benefit is that there is no down payment necessary, but these adaptable government-backed loans also feature affordable mortgage insurance, low interest rates, and more.
Even though a USDA loan can save you money, you should keep in mind that there will be closing costs in any real estate transaction, including one involving a USDA loan.
USDA loan closing costs typically range from 3 to 6 percent of the purchase price, but each homebuyer’s circumstance is unique.
USDA Loan-Related Closing Costs
Closing costs associated with the loan application process as well as costs and fees associated with owning real estate are typically incurred when purchasing a home.
Closing costs can vary depending on the lender, the loan type, and other elements. For instance, while some lenders may charge fees to originate and process your loan, others may not.
Some loan-related closing costs you might encounter can include:
| Closing Cost Type | Description |
|---|---|
| Origination fee | Lender charge to cover the costs of “originating” the loan application |
| Processing or underwriting fees | Lender charge to process, approve, fund and service a loan |
| Notary fees | Cost to pay the professional verifying the signatures of everyone signing documents |
| Title insurance | Protects lenders and buyers against title-related claims to the property |
| Credit report fees | Lender fee to “pull” your credit and ensure you are a good credit risk, in that you have paid past debts on time |
| Appraisal fee | Determines the market value of the home to make sure it is worth at least as much as you are paying |
| Discount points | Lender fee in exchange for a reduced interest rate. . Your lender can help you determine if this is a financially wise move for you over the life of the loan depending on your individual situation. |
| Well, septic and termite inspection fees | Different states and even municipalities have specific laws concerning the inspections that are required prior to making a loan. Your lender will ensure you have all the appropriate testing done prior to closing. |
Additionally, there is an upfront fee of 1% for USDA buyers, which is allocated to the loan program. Buyers can add the upfront fee to their loan in addition to the amount they are borrowing to buy the house, unlike with these other closing costs.
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Non-Loan Related Closing Costs
Obtaining a USDA loan may result in additional closing costs for homebuyers.
These might include:
How to Pay for Closing Costs
For a USDA loan, there are several ways to handle closing costs. It may be possible for prospective buyers to have sellers pay for these expenses or even finance them into the loan.
The seller may agree to pay the closing costs in the form of a “seller credit” if they are motivated to sell their home quickly or in order to reach a specific purchase price. When the time comes to enter into a contract, this is something you’ll negotiate.
Sellers can contribute up to 6% of the purchase price toward your closing costs and concessions when you use a USDA Loan.
In some circumstances, you may be able to finance these expenses through your loan. In that case, the house would appraise for more money than it cost to buy it. Talk with a USDA loan specialist for more details.
The lender may be able to pay these costs for you, but it’s important to understand that this usually means you’ll end up with a higher interest rate. But what if the seller won’t cover them and you can’t finance them?
The higher interest rate is effectively rebated to lenders, who use some of the proceeds to cover your closing costs.
Buyers will be responsible for covering these costs at closing if all else fails.
Closing Costs for USDA Refinancing
Homeowners may be able to refinance their current mortgage using a USDA-backed loan.
There are several USDA refinance programs available. These include:
Your lender can assist you in determining whether a USDA refinance is ideal for you. One strategy is to calculate the loan’s “break-even” point, which is calculated by dividing the total closing costs by the monthly savings. Therefore, if you spend $2,000 on closing costs to reduce your mortgage payment by $100 per month, it will take 20 months, or just under two years, to break even.
See if a USDA loan is right for you with all its benefits, including the variety of USDA closing cost options.
Check your USDA eligibility with a USDA loan specialist.
FAQ
Can you negotiate closing costs with USDA loan?
The flexibility provided by a USDA mortgage in terms of closing costs is one of its many advantages. First, up to 6% of the closing costs can be covered by concessions from the sellers. You and the seller can agree to have the closing costs and escrow fees paid by the seller as part of your purchase agreement.
What is the upfront fee for USDA loans?
Similar to mortgage insurance for a USDA loan, a USDA loan guarantee fee refers to how the USDA mortgage is paid. One percent of the loan amount is required as an upfront guarantee fee. The annual fee is equal to 0. 35% of the loan amount for 2021.
Are USDA loans expensive?
USDA loans typically cost less than FHA and conventional loans because they require lower down payments and have fewer or no upfront costs. Additionally, borrowers are eligible for 100% financing, and closing costs and mortgage insurance premiums may be rolled into the loan.
What causes a USDA loan to be denied?
A loan application may be rejected for reasons such as unreliable income, unreported debt, or even just having too much household income relative to your location. Get a clear understanding of your income and debt situation, as well as any potential options, by speaking with a USDA loan specialist.