USDA Loan Closing Costs and Fees
Millions of Americans have benefitted from the low-cost perks of the USDA home loan program. USDA home loans have no down payment requirement and come with some of the lowest average interest rates in the market. Still, it's important to thoroughly review the costs of any home loan so you know what to expect on closing day.
Generally, USDA loan closing costs run between 3% to 6% of the home's purchase price. The total cost of the loan and cash needed at closing varies widely from one borrower to the next, depending on your credit, the lender, and the property.
Do USDA loans require a down payment?
USDA loans do not require a down payment, making homeownership more accessible for buyers without significant savings. Unlike conventional loans, which often require a 5% to 20% down payment, or FHA loans, which require at least 3.5%, USDA loans allow borrowers to finance 100% of the home's purchase price.
It is important to note that borrowers must still pay closing costs and other USDA loan fees.
Neighborly AdviceEven though it isn't required, it can be beneficial to put money down at closing to reduce your monthly payments and interest costs over time. A lower loan balance also means a smaller annual guarantee fee, saving you money in the long run.
Dan Bartelt, Underwriter
The USDA Guarantee Fee
Instead of mortgage insurance, USDA loans have a 1% upfront fee and a 0.35% annual fee based on the remaining loan balance. These fees help fund the USDA loan program and reduce risk for lenders. If a borrower defaults, the USDA guarantees a portion of the lender's loss, allowing private lenders to offer no-down-payment loans to eligible rural and suburban homebuyers.
USDA Guarantee Fee Example
The USDA upfront fee is typically financed, meaning it will be added to your total loan amount if you don't pay it at closing. Here's an example of how it works:
| Example Loan Amount | $200,000 |
| Upfront USDA Fee (1%) | $200,000 x 1% = $2000 |
| Total | $202,000 |
The USDA annual guarantee fee is calculated as a percentage of the remaining loan balance each year and divided among your monthly mortgage payment.
Let's continue with the example above to explain how the annual fee is calculated:
| Year 1 Loan Amount | $202,000 |
| Annual USDA Fee (0.35%) | $202,000 x 0.35% = $707 |
| Annual USDA Fee Monthly Cost | $707 / 12 = $58.92/month |
It's important to note that the USDA annual fee is a recurring fee that is not cancelable.
Except for the USDA guarantee fees, USDA closing costs are similar to other mortgages. They typically fall into two categories: mortgage and title-related fees and property-related expenses.
Two Types of USDA Loan Closing Costs
Let's look at both types of USDA home loan closing fees and their estimated costs.
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Lender Related Costs
First up are your loan and title costs. These vary depending on your mortgage lender, credit score, location, and purchase price, but here's a look at some common fees you may owe:
- Origination fee: This is charged by your lender for originating the loan. Estimated cost: 1% of your loan amount
- Processing/underwriting fee: Another lender-side fee, this one's for processing and administering your loan. Estimated cost: $500 to $1,000
- Credit report: To assess your risk as a borrower, your lender will pull your credit report when you apply for the loan. Estimated cost: Up to $100 per application
- Discount points: You might opt to buy "points" to lower your interest rate. Estimated cost: 1% of your loan amount
- Appraisal fee: Your lender will require your home's value to be appraised before approving your loan. Estimated cost: $600 to $750
- Title search: This is a deep dive into the property's title to ensure there are no legal or ownership issues outstanding. Estimated cost: $500 to $1,000
- Prepaid interest: You'll need to pay interest on your loan for each day between your closing date and the end of the month. Estimated cost: Depends on your interest rate and loan amount
At Neighbors Bank, we may not charge for all the fees you see above. We're happy to walk you through all of your closing costs before your closing day.
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Property-Related Costs
You will also have costs associated with the home you're purchasing. These include things like:
- Prepaid property taxes: As you did with your loan interest, you may also need to prepay part of your property taxes. You might also need to pay a portion into your escrow account for future bills. Estimated cost: About 1% of the property value, though it varies
- Home insurance premiums: Most lenders require you to pay for at least the first year's home insurance premium upfront. Again, you may need to pay an additional amount into your escrow account as well. Estimated cost: $800 to $1,500 per year
- Recording fees: Once you close on the loan, your deed will need to be recorded with the county. Estimated cost: $300
- HOA fees: If your property is located in a community governed by an HOA, you'll need to pay your HOA dues — or a prorated part of them — in most cases. Estimated cost: Varies
- Home warranty fees: Many borrowers choose to purchase a home warranty when they buy a house. These fees are paid at closing as well. Estimated cost: $300 to $500
Your property-related expenses will depend on where your home is located, the tax rates in your area, and your insurance company. Be sure to shop around for your policy, as it could save you valuable cash.
4 Ways To Pay for USDA Closing Costs
Fortunately, not all your closing costs have to come out of pocket. In fact, there are several other methods you can explore with a USDA loan.
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Negotiate a Seller Credit
Sellers can contribute up to 6% of the home's purchase price toward your closing costs. So, if you're buying a home for $200,000, they could pitch in as much as $12,000.
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Roll Costs Into Your Loan
Buyers often roll the USDA upfront fee into their loan amounts, but USDA loans also have a unique feature where closing costs can be financed if the home appraises for more than the listing price.
Neighborly Advice
Say a home's sales price is 100,000 and the home appraises for $105,000. We see that a borrower will need roughly $5,000 for closing costs. In this case, if the borrower wants, we can increase the loan amount by $5,000 so nothing is owed at closing. However, if the borrower goes this route, they will have to pay interest on their closing costs.
Dan Bartelt, Underwriter
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Ask About Lender Credits
Your lender can also offer credits toward closing or waive your fees entirely. This usually comes with a higher interest rate, which also means a higher monthly payment and more interest paid long-term.
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Use Gift Funds
USDA loans allow gift funds from family members, loved ones, or even employers. Gift funds are money gifted to a homebuyer to help cover their down payment or closing costs.
Neighborly AdviceTypically, state agencies, cities, and non-profits offer down payment and closing cost assistance programs, however, because USDA loans do not require a down payment, there aren't many assistance programs available. Neighbors Bank does not offer any USDA down payment assistance programs.
Dan Bartelt, Underwriter
Have a question we didn't answer here? Ask a Neighbors Bank USDA loan specialist today!
We're happy to answer any questions you have throughout the process.
Are You Eligible for a USDA Loan?
To be eligible for a USDA home loan, your total household income cannot exceed the local USDA income limits.
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