Homebuyers need to cover several types of expenses during their purchasing journey. One of those are the closing costs associated with securing the loan. Sometimes these costs make buyers think twice before moving forward with their plan.
If you’re getting a United States Department of Agriculture (USDA) home loan, the requirements may be different from traditional mortgage programs. Don’t get blindsided by not clearly understanding what you can and cannot do when it comes to closing costs.
What Is a USDA Mortgage Loan?
USDA home loans are rural development loans that are government insured. This program started in 1991 to improve homeownership rates in rural areas. There are several benefits of choosing a USDA mortgage loan.
- Works with low to average-income borrowers.
- 100% Financing Options
- Lenient credit requirements compared to other loan programs.
- Low, fixed-interest rates.
- Can be used for purchases, refinances, and renovations.
What Do Closing Costs on a USDA Loan Cover?
There are costs involved in closing on your property that you need to be prepared to pay. With a USDA loan, you’ll have closing costs that are standard mortgage closing costs AND costs that are USDA loan-specific.
The standard mortgage loan closing costs cover:
- Underwriting fees: These are in-house fees for items your lender uses to process your loan.
- Loan origination fees: Lenders charge this fee for processing your loan application.
- Appraisal fees. Appraisers charge a fee to determine the property’s value. Typically, this amount is paid by the buyer at closing.
- Credit report fees. The bureaus charge lenders for pulling your credit report. The fee is passed on to you.
- Title and recording fees. These fees help protect your title from claims and liens, and updates government records that you are now the owner.
- Escrow fees: This fee pays to set up an escrow account that holds your earnest money.
- Discount points (if you decide to purchase them). You may decide to buy points to lower your monthly mortgage payment. If so, you’ll pay for them at closing.
How Much Are USDA Closing Costs?
Closing costs for a USDA loan fall into the same range as other loan programs, between 2% and 6% of the loan amount. These may fluctuate depending on the lender you’re using and the city or town where you’re purchasing your property.
Can USDA Closing Costs be Rolled into Your Loan?
In a word, yes. Borrowers CAN roll the closing costs into a USDA mortgage loan. USDA loans finance up to 100% of the appraised value. As long as the closing costs don’t put your loan amount over 100% of the value, you can roll them in.
Other Ways to Cover Closing Costs on a USDA Mortgage Loan
If the property appraised value isn’t high enough for you to roll your closing costs into your loan, there are other ways to handle them.
- Get the seller to pay them. During the negotiations, you may be able to get the seller to agree to pay part or all of the closing costs. If the property has several offers, this probably won’t work. For houses that have been on the market for a while, or ones that aren’t getting lots of showings, this might sweeten the pot if the sellers help with closing costs.
- Lender credits. You can agree to pay a slightly higher interest rate for your loan. This builds lender credits, which is the extra profit lenders make from the increased interest rate. These credits can be used for closing costs.
- Use a gift of money. A family member or close friend may want to help out with your homeownership dreams and gift you the money for closing costs. Keep in mind this needs to be a true gift with no expectation of you to repay them.
A USDA mortgage loan may be the perfect option for your homebuying plans. If you don’t have a down payment saved and your credit isn’t great, USDA loans may still be able to get you in a house. In many cases, you can roll your closing costs into your loan, making the upfront money requirement low and manageable. Ask you lender for more information and if a USDA mortgage loan is right for you.