Who Pays Closing Costs on a USDA Loan?

Buying a home is an exciting milestone in life, but it also comes with many expenses. One of the costs buyers have to pay is closing costs, which cover all the fees needed to finalize the mortgage transaction If you’re considering a United States Department of Agriculture (USDA) loan, you may be wondering who pays the closing costs Let’s take a closer look at how closing costs work with USDA loans.

What is a USDA Loan?

The USDA loan program helps low-to-moderate income borrowers in eligible rural and suburban areas purchase a home. USDA loans have some great benefits:

• 100% financing – no down payment required
• More flexible credit requirements than conventional loans
• Low fixed interest rates
• Can be used for new purchases and refinancing

To qualify for a USDA loan your property must be in an eligible rural or suburban area. The USDA has an eligibility map you can check to see if a property qualifies.

Your household income also can’t exceed 115% of the median income in your area. The USDA looks at the full household income, not just the income of borrowers on the loan application.

Typical Closing Costs on a Mortgage

On any mortgage loan including USDA loans you’ll have closing costs that cover various fees and expenses. Here are some common fees that make up closing costs

• Home appraisal fee – This pays for the appraiser to inspect the property and determine its value. The buyer usually covers this cost.

• Credit report fee – The lender charges this fee to pull the buyer’s credit report.

• Title fees – This covers title insurance and title search fees to ensure a clear title transfer.

• Origination fees – The lender charges this fee to process the mortgage application and underwrite the loan.

• Recording fees – Charged to officially record the property transfer in public records.

• Taxes and insurance – At closing, you’ll need to pay any upfront homeowner’s insurance premiums, property taxes, and mortgage insurance if required.

On a $200,000 home purchase, you can expect to pay $4,000 – $12,000 in closing costs, or about 2% to 6% of the total loan amount.

USDA Loan-Specific Fees

In addition to the normal closing costs, USDA loans also come with some unique fees:

• Guarantee fee – This upfront fee is 1% of the total loan amount. On a $200,000 loan, this fee would be $2,000.

• Annual fee – An ongoing annual fee of 0.35% of the loan amount. This would be $700 annually on a $200,000 loan.

So who pays these USDA loan fees? Let’s take a look at your options.

Buyer Pays Closing Costs

The most straightforward option is for buyers to pay their own closing costs. This means bringing cash to closing to cover the expected closing costs on the USDA loan.

As a rough estimate, you’ll want to save up 2-6% of the purchase price before closing day. On a $200,000 home, that’s $4,000 – $12,000 needed to cover costs.

The benefit of the buyer paying is you won’t owe anything extra on your mortgage. The drawback is it requires having cash on hand for closing day. For buyers on a tight budget, coming up with thousands in closing costs can be tricky.

Split Costs with Seller

One way to reduce your out-of-pocket costs is to negotiate with the seller to split closing costs. This is common with USDA loans since they allow seller contributions up to 6% of the purchase price.

On a $200,000 home, the seller could chip in up to $12,000 toward your closing costs. The seller credit reduces the amount you personally have to pay at closing.

Splitting costs makes the most sense on homes priced below market value or in buyer’s markets. Sellers have less incentive to contribute when demand is high and bidding wars break out.

Roll Costs into Loan

A unique advantage of USDA loans is you can roll closing costs into the mortgage loan itself. This avoids paying anything out of pocket.

Here’s how it works:

• Home purchase price: $200,000
• Appraised value: $210,000
• Closing costs: $8,000

Since the appraisal is higher than the purchase price, you can qualify for a loan up to the full $210,000 appraised amount. So you could take out a mortgage for $208,000 – enough to cover the $200,000 sales price plus $8,000 in closing costs.

The catch is you can only roll costs into the loan if the appraisal exceeds the purchase price. And the 100% financing perk has limits – you can’t exceed the appraised value.

Other Options to Cover Costs

If the appraisal comes in too low to roll costs in, here are a couple other options buyers can explore:

• Lender credits – You pay a slightly higher interest rate and the lender provides a credit toward closing costs.

• Gift funds – A relative or nonprofit gifts you the cash to cover closing expenses.

• Grants – Some down payment assistance grants can be applied to closing costs too.

The ideal solution depends on your financial situation and the market conditions where you’re buying. A loan officer can walk you through the pros and cons of each option.

Key Takeaways

Closing costs are a reality with any mortgage loan, including USDA loans. As the buyer, you’re responsible for these costs unless you negotiate otherwise. Here are some key points to keep in mind:

• Budget 2-6% of the purchase price for typical closing costs.

• USDA loans allow rolling costs into the loan if the appraisal is high enough.

• Seller credits are possible up to 6% of the sales price.

• Shop around with different lenders for the best rates and fees.

• Discuss options with your loan officer if you’re short on cash for closing.

While closing costs add to your upfront expenses, don’t let it deter you from exploring USDA loans. Their flexible credit requirements and 100% financing option make homeownership attainable for many buyers. Understanding clearly who pays what fees will help you create a closing cost budget and find ways to offset those costs as needed. With the right preparation, you can handle closing costs smoothly and start enjoying life as a proud homeowner.