USDA Loan Closing Costs: Can You Roll In Closing Costs into Your Loan?

What is a USDA Loan?

U.S. Department of Agriculture (USDA) loans are government-backed mortgages for low-income home buyers. They are non-conforming loans guaranteed by the USDA Rural Development Guaranteed Housing Loan Program.

USDA loans have lower interest rates than conventional mortgages and require zero down payment. This makes them affordable for low to moderate-income home buyers.

How Much is the Closing Cost on a USDA Loan?

There is no specific cost. You will have to pay the general conventional closing costs. USDA allows seller concessions of less than 6% of the sale price. This means the seller can cover buyer closing costs only up to 6% of the purchase price.

For instance, you would spend $6,000 to $18,000 in closing costs for a home bought for $300,000 with a USDA loan. The seller can offer to cover up to $18,000 of your closing costs.

» Closing Cost Calculator: Calculate your closing cost.

Do USDA Loans Cover Closing Costs?

Typically, no loan covers closing costs. However, with USDA loans, you can roll some part of the closing costs into your loan if the appraised value exceeds the sale price. You can use the surplus to pay the closing costs.

For instance, you buy a house for $275,000. But its appraised Fair Market Value was $300,000, and you have a $25,000 surplus. Your maximum estimated costs would be $18,000. So, you can seek a loan of $293,000, which is still less than the appraised home value.

» Appraised Value Vs Market Value: Check out the key differences between Appraised Value and Market Value.

What Do USDA Loan Closing Costs Pay For?

Closing costs include the amount required to secure a mortgage and costs associated with buying your home.

Traditional Closing Costs

• Loan Origination Fee: The lender charges this fee for processing the loan application and preparing the necessary documentation.
• Home Appraisal Fee: Before approving a USDA loan, the lender conducts a home appraisal to determine the Fair Market Value of the property. The appraisal fee covers the cost of this evaluation.
• Credit Report Fee: The credit report fee covers the cost of assessing your credit score to determine your creditworthiness.
• Title Fee: The title fee comprises costs of title examination and title insurance. Title examination ensures that the property’s title is clear of any liens or ownership disputes. Whereas, title insurance protects you against any potential title defects. Here’s how much title insurance costs.
• Escrow Fee: Many USDA loans require you and the seller to start an escrow account. Escrow accounts hold funds for property taxes, homeowners insurance, and other expenses.
• Homeowners Insurance: Typically, your lender will require you to obtain homeowners insurance to protect the property against loss or damage. Closing costs may include the payment of the first year’s premium.
• Recording and Transfer Fees: These fees cover the cost of keeping the record of the mortgage and transferring the ownership from the seller to you.
• Prepaid Interest: Your lender might require you to pay interest on the loan from the closing date until the end of the month. Lenders often include this amount in the closing costs.

USDA Specific Closing Costs

There are no USDA loans specific closing costs. However, some closing costs may vary depending on the lender, property location, and loan type.

Review the Loan Estimate (LE) provided by your lender, which outlines the estimated closing costs associated with their USDA loan. You can also use the USDA loan closing costs calculator to estimate your closing expenses.

🚩 Note: Lenders are supposed to pay Guarantee Fees and Annual fee, which they pass on to borrowers.

USDA Loan Closing Cost Assistance

You can use the following methods to cover closing costs for a USDA loan:

• Negotiate USDA Seller Concessions: Home sellers can offer up to 6% in USDA loan seller concessions. Experts predict 2024 is a strong buyer market, the seller may offer more concessions.
• Roll Closing Costs in the Loan: If the appraised value of your home exceeds the sale price, you can roll in your closing costs in the loan.
• Get Gift Funds: Show you are using gift funds to cover the closing costs and are not required to return the amount. It can come from a family member, a friend, or an acquaintance.
• Ask for Lender Credits: To get lender credits, you must borrow the loan at a higher interest rate. In return, your mortgage lender might offer to cover the closing costs. Remember, a higher interest rate means higher monthly loan payments.
• USDA Closing Costs Grants: There are grants specially designed to assist buyers with USDA loan closing costs. Typically, local or state housing authorities or nonprofits offer these grants. Research the eligibility criteria for USDA closing costs grants before you apply.

The Bottom Line

Home buyers seeking affordable housing options should consider a USDA loan. It is perfect for first-time home buyers who have limited money for the down payment. There is no direct cost associated with it.

However, they come with some traditional closing costs, which range from 2% to 6% of the property’s purchase price. Explore alternatives such as seller concessions and grants to mitigate the financial burden associated with closing costs.

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