Buying a home is a big decision, but it’s often one that makes financial sense. Owning a home typically allows more freedom compared to that you’d have as a renter and allow the homeowner to build equity.
But isn’t it hard to get a home loan? Not when it comes to a USDA home loan. USDA loans offer first time and even repeat buyers a way to purchase a home with no down payment required (though, like any other mortgage loan, there are closing costs.)
In many ways, USDA loan closing costs mirror most loan types including appraisal, title search, title insurance, credit report fee, and more. But there are some unique USDA fees and possible inspections. So, let’s review these closing costs for USDA loans.
- USDA Guarantee Fee
- USDA Annual Fee
- Inspections Required by USDA
Furthermore, we discuss 3 strategies for buyers to cover the USDA loan closing costs rather than bringing cash to close.
USDA Guarantee Fee
USDA is a government loan offered through approved mortgage lenders. So, each government loan has an up-front and financed guarantee or funding fee. This fee is paid directly to the government agency. In this case, the USDA Guarantee fee is collected by the lender at closing and is paid to the U.S. Department of Agriculture. Over time, the USDA guarantee fee has fluctuated in the amount charged. It can change at the beginning of each USDA fiscal year.
Currently the USDA guarantee fee is 1% of the base loan amount. Fortunately for buyers, the fee is financed on top of the base loan amount, which does not require borrowers to bring it to closing or verify funds to cover the fee.
Compared to other government loan fees, USDA is on the lower side. FHA is currently 1.75% and VA may be 1.5% – 3.3%, depending on the scenario. Since the fee is considered low and it is financed, it does not put undue stress on a buyer’s finances. Actually, the extra monthly payment from financing the USDA guarantee fee is only a few dollars a month, depending on the interest rate.
USDA Loan PMI
Also, like most low down payment programs, USDA Rural Development loans require mortgage insurance (commonly called PMI). USDA PMI is actually called a USDA annual fee. Even though it is included in a borrower’s monthly payment. Not technically a closing cost, it is something that affects a purchase’s affordability. USDA loan PMI is also very low compared to other low down payment programs. For instance, FHA PMI for 3.5% down payment is .85% of the loan amount divided by 12 months. Where USDA loan PMI is only .35% and it does not require a down payment. Therefore, assuming the same interest rates, USDA should be a lower payment than FHA even though USDA does not require a down payment.
USDA PMI continues for the entire 30-year term of the loan, but it does go down each year based on the new balance. This is why it is called a USDA annual fee. Each year, the USDA PMI is figured by calculating the new balance times the .35% annual fee, then dividing by 12 months. Additionally, paying down the mortgage balance quicker than the 30 year term also reduces the USDA loan PMI quicker than the scheduled amount.
USDA Loan Closing Costs – Well Water Test
Buying a home outside the city limits is common when using a USDA loan. Although, it is not always a USDA requirement to buy outside the city limits. Often buying a rural property means the property will have a private well. When the home water supply is from a private well, USDA requires a well water test. USDA loan guidelines states, “the water quality of the well must meet the requirements of the state or local authority. If the state or local authority does not have specific requirements, the maximum contaminant levels established by the Environmental Protection Agency (EPA) will apply.”
Typical costs of a USDA water test ranges from $50 – $150.
USDA Loan Closing Costs – Septic Inspection
Like properties with a well, homes with a private septic system are common outside the city or town limits. Being that a property is not hooked up to public sewer, USDA has certain requirements of private septic systems. First, the septic tank must meet distance requirements from property lines and from a well. Then, the septic tank must appear to be in working condition (free from from observable failure).
These requirements may be met by the appraiser’s inspection, licensed home inspector, licensed septic specialist or government health agency. Although, the appraiser may satisfy the condition, many lenders or even USDA requires a septic inspection. For lenders, the USDA conditional commitment should be reviewed for septic requirements.
Typical costs for a septic inspection ranges from $200 – $500.
Traditional USDA Loan Closing Costs
So, we have discussed the required guarantee and annual fee along with potential well and septic inspections. Other than that, it is a standard mortgage loan. Typical closing costs include the following:
- Appraisal – This is an FHA appraisal with one specific bit of USDA language added
- Credit report – Tri-merge report
- Flood certification – Verify if property is located in a flood hazard area
- Lender fees – Could be origination fee, discount points, and other possible fees
- Title search
- Closing attorney
- Title insurance – Varies by state, purchase price, and loan amount
- Recording fees – to record the deed and mortgage
- Transfer tax / deed stamps – Some states the buyer pays this fee, others the seller pays
- Miscellaneous – Depending on the state, lender, and property, there could be other costs
Ways to Cover USDA Loan Closing Costs
Now you know the required and potential USDA loan closing costs. As a buyer, maybe you’re getting a little worried how to pay for all of this. Luckily, there are some strategies for buyers to cover closing costs.
USDA Closing Costs Paid By Seller
Rather than bringing more cash to close, USDA loans allow the seller to pay up to 6% of the sales price towards the buyer’s closing costs. Therefore, the seller may pay part or all of the buyer’s closing costs. In order for the seller to pay buyer closing costs, it must be specifically stated in the purchase contract. Then, the USDA loan may lend up to 100% of the sales price which includes the seller paid costs!
USDA Loan Closing Costs Paid By Lender
Another option for a buyer to lower their costs at closing is to receive a lender credit. Often, a lender has the option of raising the interest rate so that the lender is able to provide a credit towards the buyer’s costs. Yes, the interest rate is higher. But, sometimes paying a little higher rate and monthly payment is more important to a buyer than bringing more funds to closing. Having a strategy discussion with an experienced USDA lender could determine if this strategy fits.
Increase USDA Loan Amount to Cover Closing Costs
Typically, buyers ask the question, “If the home appraises higher than the purchase price, does that help?” Most of the time, the answer is no. Home loans lend based on the purchase price or appraised value, whichever is lower. Unlike any other major loan, USDA will lend based on an appraised value when higher than the purchase price. So, if the appraisal comes in higher than the purchase price, the USDA loan amount may be increased to cover closing costs! Pretty cool strategy! The only negative is that buyers do not know the appraised value prior to signing the purchase contract or the initial mortgage documents. Therefore, it is tough to plan for this idea.