USDA loans feature some significant benefits, especially for first-time homebuyers. The largest advantage is that there’s no down payment required, but these flexible government-backed loans also come with low mortgage insurance costs, competitive interest rates and more.
Even with the money-saving benefits of a USDA loan, it's important to remember that any real estate transaction, including one with a USDA loan, will have closing costs.
Closing costs on USDA loans generally run between 3 to 6 percent of the purchase price; however, every homebuyer's situation is different.
Let’s take a closer look at USDA loan closing costs.
USDA Loan-Related Closing Costs
Buying a home typically features closing costs related to the loan process, as well as costs and fees that come with owning a piece of real property.
Closing costs can vary by lender, loan type and other factors. For example, some lenders might charge a fee to originate and process your loan, while others might not.
Some loan-related closing costs you might encounter can include:
- Origination fee: This is what the lender charges to cover the costs of “originating” the loan application.
- Processing or underwriting fees: This is what the lender charges to process, approve, fund and service a loan.
- Notary fees: This is to pay the professional who verifies the signatures of everyone signing the documents.
- Title insurance: Buyers are required to purchase lender’s title insurance and will typically want to buy owner’s title insurance as well. This type of insurance protects lenders and buyers against title-related claims to the property.
- Credit report fees: This is to pay the lender to “pull” your credit and ensure you are a good credit risk, in that you have paid past debts on time.
- Appraisal fee: This determines the market value of the home to make sure it is worth at least as much as you are paying
- Discount points: These are fees paid to a lender in exchange for a reduced interest rate. Your lender can help you determine if this is a financially wise move for you over the life of the loan depending on your individual situation.
- Well, septic and termite inspection fees: Different states and even municipalities have specific laws concerning the inspections that are required prior to making a loan. Your lender will ensure you have all the appropriate testing done prior to closing.
USDA buyers also have a 1 percent upfront fee that goes directly to the loan program. Unlike these other closing costs, buyers can finance the upfront fee into their loan on top of what they’re borrowing to purchase the home.
Non-Loan Related Closing Costs
Homebuyers can encounter additional closing costs when securing a USDA loan.
These might include:
- Prepayment of property taxes or homeowners insurance: You’ll typically have a prorated property tax payment due at closing, and lenders will require you to pay for your first year of homeowners insurance.
- Daily interest charges: Also known as prepaid interest, this is the amount of interest that you will owe for the days between your loan closing and the end of the month.
- Recording fees: This is a one-time payment that goes to your county to make your purchase official.
- HOA fees: If you buy a home in a neighborhood with a “Homeowners Association,” (HOA), you’ll pay these fees upfront.
- Home warranty: While not required, a home warranty can cover a wide variety of house-related costs not covered by your homeowners insurance.
How to Pay for Closing Costs
There are multiple ways to handle closing costs for a USDA loan. Prospective buyers may be able to have sellers cover these costs for them or even finance them into the loan.
A seller who is eager to sell their house quickly or reach a certain purchase price may agree to pay the closing costs in the form of a “seller credit.” This is something you’ll negotiate when it’s time to get under contract.
On a USDA Loan, sellers can contribute up to 6 percent of the purchase price toward your closing costs and concessions.
In some cases, it’s also possible to finance these costs into your loan. That involves the home appraising for more than the purchase price. Talk with a USDA loan specialist for more details.
But what if the seller won’t cover these costs and you can’t finance them? The lender may be able to pay them for you, although it’s important to understand that this route typically means you’ll wind up with a higher interest rate.
Lenders get what’s essentially a rebate on that higher interest rate and use some of the proceeds to pay your closing costs.
If all else fails, buyers will be on the hook for paying these costs at closing.
Closing Costs for USDA Refinancing
Homeowners looking to refinance their current mortgage may be able to do so with a USDA-backed loan.
There are several USDA refinance programs available. These include:
- A streamlined refinance, which allows homeowners with a current USDA loan to refinance without having to have the property re-appraised or document their income. The closing costs can be rolled into the new loan for this program.
- The non-streamlined USDA refinance program will still require proof of income; and on this one closing costs cannot be rolled into the monthly payment.
Your lender can help you decide if a USDA refinance is right for you. One tool is to determine the “break-even” point of the loan; that is, your total closing costs divided by how much you will save each month. So if you're spending $2,000 in closing costs to save $100 a month in your mortgage payment, the break-even point will be 20 months—or just under two years.
With all the advantages of a USDA loan, including multiple options for USDA closing costs, see if one is right for you.