You may be able to avoid paying USDA loan closing costs upfront if your home appraises for more than the sale price.
USDA loan closing costs can vary depending on a potential homebuyers’ situation. USDA loans are among the best mortgage options out there: 0% down* for a home loan. Even better, you may be able to avoid paying USDA loan closing costs upfront if your house appraises for more than the sale price.
Do you pay closing costs with USDA loans?
Yes. All loans require closing costs. USDA loan closing costs include the origination fee, appraisal fee, title fee, attorney fees, and other mortgage-related expenses.
Typically, USDA borrowers are eligible to buy a home with 0% down payment, but they must pay closing costs. Generally speaking, closing costs are 2-5% of your loan amount.
In other words, if your mortgage is $220,000,the closing costs will fall somewhere between $4,400 and $11,000. The average closing cost in the U.S. during 2021 was $6,837 including taxes, a more than10% leap from 2020 levels, according to Closing Corp ,a real estate data company.
Not only that, but the less expensive your house, the higher the percentage of the purchase price closing costs are likely to be. That’s because a lot of closing costs, such as appraisal fees and title search fees, are fixed. The cost is the same no matter the price of your house.
The good news is you can plan for your USDA loan closing costs. Lenders are required to send you an estimate of closing costs and monthly payments for the loan when you are preapproved for a mortgage. The estimate is very useful in figuring out how much you’ll need when closing rolls around.
USDA loan program borrowers can either pay the closing costs from their own savings or by using gift funds or closing cost assistance.
What are USDA loan closing costs?
Here's a brief overview of potential closing costs and average prices. Prices may vary across the country, depending on your home price and specific location.
Also, not all USDA loan closing costs are uniformly required. Some states, for instance, may not require lawyers to review mortgage documents. In that case, no attorney fee would be necessary.
● Application fee: $300
● Origination fees: 0-1% of the loan
● Title search and title insurance:$300 to $2,500
● Escrow fee: $500
● Appraisal fee: $500
● Survey fee: $400 (not required if an acceptable one already exists)
● Credit report fee: $35
● Recording: $100
● Notary fee: $100
● Home inspection fee: $500
● Pest inspection: $100
● Attorney fee: $500-$1,000 (if required)
USDA loans also require a guarantee fee of 1% of the loan at closing.
This list isn’t intended to cover every eventuality. Depending on your area and lender’s requirements, you may have to pay fees for mandates like flood certification. You may also need to pay daily interest charges for the period between the mortgage loan’s closing and the date of your first mortgage payment.
How to avoid USDA loan closing costs
If the house you want to buy appraises for more than the sale price, you may be able to wrap the closing costs into your USDA loan. That means you wouldn’t need any money upfront to purchase the home.
“One of the great perks about this loan is that you can roll your closing costs into the loan amount if the property appraises for higher than the purchase price,” says Blair Chandler, a Fairway branch sales manager. “This is a great tool right now due to the fact that a good bit of sellers are not contributing much towards closing costs.”
For instance, let’s say you’ve gone under contract on a house for $220,000. But the appraiser values the home at$230,000. The appraised value of the home is greater than the sale price, which is great news for you – that means you’re getting a deal on the property.
Let’s assume your closing costs are $9,000.Because of the USDA’s closing cost rule, you may be able to borrow $229,000 —$220,000 for the home plus $9,000 for the closing costs – with no money upfront.
Keep in mind that the loan closing costs would be added to your mortgage total, so you don’t avoid paying them altogether. And wrapping closing costs into the loan means you will pay interest on that amount, so you’ll end up paying more than you would if you paid these costs upfront.
And there’s no guarantee the appraisal will work out in your favor.
“Although it is true that some closing costs can be rolled into the loan in the event the home appraises higher, but that is not the trend currently,” says Jim Szabo, a senior loan officer at Fairway in Scottsdale, Arizona. “Instead, many states offer down payment assistance** programs that will cover the closing costs on a USDA purchase. In some instances, a borrower can purchase the home for less than $1,000 out of pocket.”
There’s also the possibility that the appraisal will come in right at the sale price.
“USDA allows for financing a maximum of the appraised value of a home. This means that if the home appraises for more than the purchase price, it may be possible to finance closing costs and prep aids into the loan,” explains William Dawes, a Fairway branch manager in Salem, Ohio. “So, if you buy a home for $250,000and the home appraises for $253,000 it is possible to finance $3,000 of your fees into the mortgage – you can finance a maximum of $253,000.”
But, he adds, “If you buy the same home for$250,000 and the home appraises for $250,000, then there is no room to finance any fees and you would be responsible for paying these fees out of your own pocket.”
That doesn’t mean you’re out of options, though. In addition to exploring down payment assistance, you can see if your seller is open to helping out with closing costs. That’s less common generally in the current market, but as trends favor buyers again, you may find a willing seller. Additionally, real estate is highly local, and you may be buying in an area where homebuyers have more negotiating power.
“The safest way to be sure that the fees are covered is to negotiate into the price you have agreed to pay for the home a contribution from the seller to cover these fees,” Dawes says. “This way, if the home appraises at the purchase price, you are good to go – because your fees are being paid by the seller as a part of this price.”
How to reduce USDA loan closing costs
If you’re not eligible to wrap your USDA loan closing costs into your mortgage, there are other ways to reduce your up front expenses.
Closing cost assistance
All U.S. states offer programs to help homebuyers with their down payments and closing costs. These programs are typically referred to as down payment assistance** (DPA), but they often include help with closing costs as well.
Chandler shares that he helped a homebuyer recently who purchased a home with a 0% down USDA loan plus a state program that covered all of the closing costs and prepaid expenses needed to close.
Closing cost assistance may be available as either a grant or loan. Oftentimes, closing cost assistance loans take the form of 0% interest second mortgages that are forgiven if you live in the home for an agreed-upon period of time. They may also be paid off when you sell the home. Grants do not need to be repaid. However, you may have to stay in the home for a certain number of years to qualify.
Eligibility for down payment and closing cost assistance varies by program. Your state housing finance authority should be able to provide some information on state-level offerings, but be sure to research what’s available in your city or county as well. There are many assistance programs out there to help worthy borrowers purchase homes.
Gift funds with USDA loans
USDA loans allow gift funds to be used for closing costs. That means approved family, relatives, and friends can provide cash gifts that may be used toward your upfront homebuying expenses. You can also use charitable donations or employer assistance as gift funds.
It’s important to understand, though, that your lender will require verification that the money is in fact a gift, rather than a loan that needs to be paid back. A loan can change your debt-to-income ratio† (DTI), one of the crucial metrics of mortgage approval.
Most lenders require a gift letter and other supporting documentation from the borrower and donor as part of the loan. A gift letter states that the specific amount given is a gift and that repayment will not be required. Both the giver and you need to sign the letter.
Be sure to check with your lender as many have specific templates for the letter and specific requirements for documentation of gifts.
USDA loan closing costs FAQs
What is the upfront fee on a USDA loan?
The USDA Guarantee fee, which is paid at closing, is 1% of the loan amount. USDA borrowers also pay an annual mortgage insurance fee of 0.35% of the loan balance.
What is the USDA Guarantee fee for 2022?
The USDA Guarantee fee for 2022 is 1% of the loan amount. Typically, this fee is paid at closing.
Do USDA loans take longer to close?
USDA mortgage loans can take longer to close than other types of mortgages. Before your lender’s underwriting team can give final approval to the loan, it must be reviewed by the USDA. This can add several days or weeks to the process, depending on the USDA’s current turn times for reviews. Your lender can tell you about how long to expect to wait before closing.
The bottom line on USDA loan closing costs
Closing costs can equal thousands of dollars, which can be a hurdle for homebuyers. But there are ways to whittle down or eliminate them. USDA loans permit closing costs to be rolled into mortgages if the appraisal value tops the sale price. If it doesn’t, you can apply for assistance or use gifts for closing costs.
Start your homebuying journey here.
*USDA Guaranteed Rural Housing loans subject to USDA-specific requirements and applicable state income and property limits.
**Eligibility subject to program stipulations, qualifying factors, applicable income and debt-to-income (DTI) restrictions, and property limits.
†Debt-to-income (DTI) ratio is monthly debt/expenses divided by gross monthly income.
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