USDA loans offer an incredible opportunity for eligible borrowers to purchase a home with no down payment. However, while you may not have to bring cash to closing for a down payment, there are still some hidden costs to be aware of when financing a home with a USDA mortgage.
What is a USDA Loan?
USDA loans are a type of government-backed mortgage loan provided by the United States Department of Agriculture, These loans help low to moderate income families living in rural areas obtain home financing
With a USDA loan, you can qualify for 0% down financing. However, just because you don’t have to make a down payment doesn’t mean there are no costs associated with a USDA mortgage
Common Closing Costs
When obtaining any type of mortgage, you can expect to pay closing costs. Closing costs with a USDA loan typically range from 2-5% of the total mortgage amount. Here are some common fees to anticipate:
- Origination Fee: Up to 1% of the loan amount to the lender for processing the loan
- Credit Report Fee: Cost of obtaining your credit reports
- Appraisal Fee: Expense of having the home valued by an appraiser
- Title Fee: Provides title insurance to the lender against any claims
- Recording Fees: Cost for legally recording the transaction
- Prepaid Property Taxes: Part of your property tax bill due at closing
- Prepaid Homeowners Insurance: A portion of your homeowners policy
While the seller can provide up to 6% in concessions to cover some of these costs, not all expenses may be covered. You’ll likely have to pay at least some of these fees out of pocket.
USDA Specific Fees
In addition to the general closing expenses listed above, there are some specific costs associated with USDA loans:
- Guarantee Fee: This upfront fee is 1% of the loan amount and goes toward the ongoing costs of operating the USDA loan program.
- Annual Fee: An annual 0.35% fee for USDA mortgage insurance, divided into monthly payments.
These fees are mandatory when obtaining a USDA home loan.
Prepaid Property Taxes and Insurance
Two hidden costs that often catch borrowers by surprise are prepaid property taxes and homeowners insurance.
As part of your closing costs, the lender will require you prepay a portion of these recurring housing expenses. This ensures payments are made on time to avoid issues like tax liens against the home.
Here’s an estimate of how much you may need to prepay:
- Prepaid Property Taxes: Around 1% of the home’s value
- Prepaid Homeowners Insurance: Typically 12-14 months
On a $300,000 home, you may need to prepay:
- $3,000 in property taxes (1% of value)
- $1,200 for 12 months insurance at $100/month
This upfront amount can add thousands to your closing costs.
Mortgage Interest Prepayment
Your first mortgage payment is often due within 30-45 days after closing. This means you’ll need to prepay interest covering the first partial month.
For example, if you close on the 15th but your first payment isn’t due until the 1st of the next month, you’d prepay interest for the 15 days in between. This can add $500+ to closing costs.
Inspection and Appraisal
While not required, a home inspection and professional appraisal are highly recommended. You’ll need to pay these upfront costs out of pocket.
- Home Inspection: $300-$500 on average
- Appraisal: $300-$600 typically
These provide important information to help you make a smart buying decision.
Initial Escrow Deposit
At closing, you will need to pay an initial deposit into your escrow account. Escrow holds funds for big recurring bills like property taxes and insurance.
Your lender will require a starting cushion, often equal to 2-3 months of escrow payments. With high property taxes and insurance, this could be $500+ extra at closing.
Title Search Fees
Before closing, the title company will research the home’s title history to uncover any issues like liens or claims. This title search work isn’t free.
Title document and exam fees can run $100-$300 depending on your area.
Recording Fees
The county charges a fee to officially record your home purchase and mortgage documents with public records. This cost is passed onto the buyer at closing.
Recording fees vary by county but typically add $50-$100 to closing costs.
Initial USDA Annual Fee
At closing, you’ll pay your first installment of the annual 0.35% USDA guarantee fee. This can add a few hundred dollars depending on your loan amount.
Make sure you budget for this mandatory cost that continues each year.
The Bottom Line
While a USDA loan allows you to skip the down payment, some closing expenses and prepaid costs will still come out of pocket unless the seller provides concessions. Being ready for these hidden fees ensures your home buying process goes smoothly from start to finish!
How the USDA loan program works
USDA home loans are guaranteed loans backed by the U.S. Department of Agriculture’s Rural Development Loan Program.
This loan option is designed to get low-to-average income families into homeownership in rural areas. You can qualify for a USDA loan with no down payment.
This is one of only two major products requiring no down payment. The other is the VA loan, for which you need eligible military service.
Unlike most standard home loans, the USDA loan is not a conventional mortgage backed by Fannie Mae or Freddie Mac.
Because the USDA home loan program is guaranteed by a government agency, lenders can often offer below-market mortgage rates.
Other basic USDA eligibility guidelines
- Minimum credit score: No minimum is established, but often 640 with most approved lenders
- Credit history: Credit report should show no late payments or recent foreclosures or bankruptcies
- Income requirements: Income limits vary by region and number of persons in household. Typically, your income must be less than 115% of the area median income (AMI)
- Employment requirements: History of steady income and employment. Self-employed borrowers are eligible, too
- Property requirements: Must be a single-family home located in an eligible rural area that will be your primary residence
- Loan term: USDA only offers 30-year fixed-rate mortgages
USDA Loan Closing Costs: How to Get Them Paid For You #usdaloan
FAQ
Does USDA charge a fee or fees for their loans?
Is a USDA loan a good idea?
How does an USDA loan affect the seller?
How much does a USDA loan cost?
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.
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.
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.
Who is responsible for closing costs on a USDA loan?
The homebuyer is responsible for most closing costs on a USDA loan. As discussed, you can finance these costs into the loan under certain circumstances. The seller may pay some title depending on customary practices in your area. But you are responsible for the majority of loan closing costs.