USDA Loan Closing Costs: What They Cover And What Can Be Rolled Into Your Loan

*As of July 6, 2020, Rocket Mortgage® is no longer accepting USDA loan applications.

In addition to running programs promoting food safety, nutrition and agriculture, the U.S. Department of Agriculture is also known for its home loan program, which offers affordable home loans to those in eligible rural or suburban areas.

A USDA loan is a type of mortgage loan that makes homeownership affordable for low- and moderate-income wage earners hoping to buy a home in rural (and some suburban) areas.

Although Rocket Mortgage^® doesn’t offer USDA loans at this time, we want you to be aware of the different mortgage options that may be available to you. Let’s take a look at what’s included in USDA loan closing costs and the options borrowers have for covering these costs.

USDA loans are a type of government-backed mortgage loan. The goal of the USDA’s loan program is to provide insurance for mortgage lenders so that they can offer mortgages to low- to moderate-income home buyers in eligible areas who might not qualify for mortgages otherwise. The USDA loan is a type of non-conforming mortgage, meaning it’s not a conventional mortgage backed by Fannie Mae or Freddie Mac.

What makes these loans so affordable? By design, you’re able to get one with a 0% down payment. However, just because you aren’t making a down payment doesn’t mean you won’t need to bring some cash to closing. Like all mortgages, USDA loans come with closing costs.

A USDA loan borrower’s household income can’t exceed 115% of their area’s median household income. It’s important to note that this is in contrast to other programs that only take into account the income of clients listed on the loan application. You can check whether your household meets this requirement by using the USDA’s income eligibility tool.

USDA loans are only offered in certain areas of the country: areas that the USDA defines as “rural.” However, you don’t necessarily have to live out in the country to qualify. As long as you don’t live in a city or directly outside of one, you may be surprised to find that you live in an eligible area for USDA financing.

You can use the USDA’s property eligibility map to find out if the property you’re buying is in an eligible area.

Closing costs for a purchase loan can typically run about 2% – 6% of the home’s purchase price. USDA loans allow seller concessions up to 6% of the sales price, meaning that the seller is allowed to pay up to this amount of the buyer’s closing costs.

For example, if you bought a home for $250,000 with a USDA loan, your closing costs may be somewhere between $5,000 – $15,000, and the seller could contribute up to $15,000 for your closing costs.

When you get a mortgage, your closing costs are made up of all the fees and charges you’ll incur in the process of getting your loan and buying the home.

Traditional Closing Costs

Here are some of the closing costs you can expect to incur when taking out a mortgage, regardless of whether it’s a USDA loan or another type of mortgage loan:

• Home appraisal fee: When you get a mortgage, you’ll need to get the home appraised. During this process, an appraiser will inspect the home and factor in market conditions, including the sales prices of recently sold homes that are comparable to the subject property, to determine the home’s fair market value. The buyer typically pays for this service to be completed, and the cost will be included in their closing costs.

• Credit report fee: This fee accounts for the cost the lender incurred when they pulled the borrower’s credit report.

• Mortgage origination fee: This is the fee the lender charges to process and underwrite the loan. Underwriting is the process of verifying that the borrower qualifies for the loan.

• Discount or mortgage points: When a borrower pays discount points at closing, they’re paying money to reduce their interest rate by a certain amount. This is an optional cost.

• Title insurance: Title insurance offers protection in case there are claims against the home’s title. Buyers will pay for a lender’s title insurance policy, which insures the lender against title claims on the home, as part of their closing costs. The seller often purchases the buyer’s title insurance policy, paying it as part of their own closing costs.

• Escrow fees: This covers the cost of utilizing an escrow account to hold funds that pass between the buyer and seller.

• Recording fee: This fee covers the cost to have your municipality update their public records to reflect the change in ownership of the home.

• Taxes and insurance: At closing, you may need to pay a homeowners insurance premium, a mortgage insurance premium and property taxes for the property you’re buying. USDA loans require that an escrow account be set up for these taxes and insurance payments.

These are some of the more common closing costs a buyer will incur, but your closing costs may differ depending on the details of your transaction.

USDA-Specific Closing Costs

USDA loans come with a fee called a “guarantee fee.” This guarantee fee is an upfront fee that is paid in lieu of mortgage insurance. It’s equal to 1% of the loan amount. However, borrowers don’t always have to pay this fee at closing; the USDA allows borrowers to finance the guarantee fee into their loan.

In addition to the upfront guarantee fee, USDA loans also come with an annual fee, which is equal to 0.35% of the loan amount.

USDA loans allow financing up to 100% of the appraised value of the property, plus the guarantee fee. So, if you’re buying a home with a USDA loan and the home appraises at $250,000, you can get a loan for that amount plus your $2,500 guarantee fee (1% of the loan amount). You’d be getting a mortgage for a total of $252,500.

Typically, you can’t pay for your closing costs using your loan (also referred to as rolling in your closing costs). However, USDA loans allow borrowers to roll some or all of their closing costs into their mortgages if the home appraises for more than the sales price. In this situation, you’d use the extra loan amount to cover the closing costs.

For example, say you’re buying a home for $250,000, but the appraisal reveals that the fair market value of the home is actually $275,000. That’s a $25,000 difference. If your closing costs are $12,000, you can get a loan amount that also pays for your closing costs. To do this, you’d take out a $262,000 loan (to keep things simple, we’re not including the amount for your guarantee fee in this example), which is less than the appraised value of the home.

You’re also allowed to roll your closing costs into your loan when you get a USDA streamline refinance.

If you’re not sure you’ll be able to come up with the cash to cover your closing costs, here are some alternative ways to cover this expense.

Get A Higher Loan Amount

Like we’ve discussed above, if the home you’re buying appraises for more than the sales price, you can take out a larger loan – up to 100% of the appraised value plus the cost of the guarantee fee – to pay for your closing costs.

Seller Concessions

Sellers can agree to cover the buyer’s closing costs, up to 6% of the home’s purchase price. However, this tends to be more common in buyer’s markets with motivated sellers and can be difficult to negotiate if you’re trying to buy in a hot market.

Lender Credits

Lender credits are like the reverse of discount points. Basically, you take on a slightly higher interest rate, and in exchange the lender gives you money toward your closing costs.

Gift Funds

As long as you can prove that the funds have been provided as a gift – generally by having the gift giver write a letter stating that the funds are a gift and do not have to be repaid – a family member, employer or charitable organization can assist you in paying your closing costs.

USDA loans provide rural home buyers with an affordable way to purchase a home. However, they do still come with some costs. As you begin taking the steps to buying a home, it’s important to understand what that process entails and how you need to prepare financially for it. Our Learning Center has the answers you need as you prepare to embark on your home buying journey.