USDA loans are a government backed mortgage option available to rural homebuyers. Despite its reputation as a product for “rural” properties, the guidelines actually permit purchases in approximately 97 percent of the United States.
And of course, the marquee feature of a USDA loan is that no down payment is required. But even though you won’t have to write that painful down payment check at the closing, it doesn’t mean you won’t be paying anything at all.
That’s because “closing costs” are a part of any home lending experience. These expenses can include items like appraisal fees, title insurance, credit reports, lender fees and more. Some are related to processing and finalizing a mortgage loan, while others are costs related to owning a home, like property taxes and homeowners insurance.
Typically, closing costs for a USDA loan run between 3 to 5 percent of the purchase price, but every situation is different. These aren’t typically costs that can be financed, meaning someone has to pay for them in order to close the deal.
Rather than use their own funds, borrowers may be able to have the home seller cover these costs at closing.
There’s a lot of good news when it comes to having sellers contribute to your closing costs. USDA allows sellers to pay for all of a buyer’s loan-related closing costs. In addition, they can contribute up to 6 percent of the loan amount in what are known as “concessions” to cover expenses like prepaid taxes and insurance.
Depending on your situation, a seller might be able to cover all of your upfront USDA loan costs.
It sounds too good to be true, right? Why would a seller want to pay your closing costs? Seller contributions are common with all loan types, and in some markets, that might be what it takes to sell the home.
USDA buyers will often build these costs into their purchase offer, which is why it’s important to talk with an experienced loan officer before getting under contract on a home. We’ll talk more about that shortly.
While it can seem like a no-brainer to have seller paid closing costs for USDA loans, there are some downsides to the strategy.
Home sellers in some markets might turn away buyers who are looking for help with closing costs. Home prices, housing inventory and more can all contribute to that climate, and some markets are hotter than others.
Getting help with closing costs might also mean you’re borrowing more than you might otherwise would. For example, if you’re looking at a $200,000 home and your closing costs are $5,000, you might offer the seller $205,000, with them paying all of your closing costs.
That additional money means you end up paying more in interest over the life of the loan than if you had just paid the costs in the first place.
It’s important to note that the seller paid closing costs for USDA loans cannot be any price you choose–USDA seller concession limits are limited to 6% of the loan amount.
Wondering how USDA seller concession limits compare to other loan types? This chart shows you.
Up to 6%
Up to 4%
Up to 6%
Up to 9% depending on the down payment
Seller concessions for USDA loans are among the most buyer-friendly out there. Conventional buyers can’t tap into that 9 percent cap unless they’re putting down 20 percent.
USDA’s approach to closing costs and concessions is one more reason buyers should give this loan program a closer look.