Are you considering applying for a USDA loan? Before you start the process, it’s essential to have a clear understanding of the associated closing costs. These costs, while necessary, can sometimes catch borrowers off guard. In this article, we will break down the various closing costs you can expect when applying for a USDA loan, helping you make informed financial decisions and ensuring a smooth and stress-free homebuying experience. So, let’s dive right in!
Definition of USDA Loan
A USDA loan is a type of mortgage loan program offered by the United States Department of Agriculture (USDA). It is designed to help low-income and moderate-income individuals or families in rural areas become homeowners. USDA loans have flexible eligibility criteria and offer many benefits to borrowers.
Eligibility Criteria
To be eligible for a USDA loan, you must meet certain criteria. First, the property you intend to purchase must be located in a designated rural area. The USDA provides a map on its website where you can check if a specific address is eligible.
Additionally, your income must fall within the income limits set for your area. These limits vary depending on the location and size of your household. Your credit history will also be taken into consideration, and while there is no set minimum credit score requirement, a higher credit score will improve your chances of approval.
Loan Benefits
One of the major benefits of a USDA loan is the option for 100% financing, meaning you do not need to make a down payment. This can greatly reduce the upfront costs of buying a home. Additionally, USDA loans often have lower interest rates compared to conventional loans.
USDA loans also come with flexible credit guidelines, making it easier for individuals with less than perfect credit to qualify. Furthermore, these loans do not require private mortgage insurance (PMI) even with no down payment.
Another advantage of USDA loans is that they offer fixed-rate terms, which means that your interest rate and monthly payment will remain the same for the duration of the loan.
Types of Closing Costs
Closing costs are fees and expenses incurred during the homebuying process. While some closing costs are specific to USDA loans, others are common to most mortgage loans. These costs can be divided into three main categories: lender fees, third-party fees, and prepaid expenses.
Lender Fees
Lender fees are fees charged by the lender or mortgage company for processing and closing your loan. These fees typically include:
Origination Fee
The origination fee is a fee charged by the lender for processing your loan application. It is usually a percentage of the loan amount.
Discount Points
Discount points are optional fees you can choose to pay to reduce your interest rate. Each discount point typically costs 1% of the loan amount and can lower your interest rate by 0.25%.
Credit Report Fee
The credit report fee covers the cost of obtaining your credit report.
Appraisal Fee
The appraisal fee pays for a professional appraisal of the property to determine its market value.
Underwriting Fee
The underwriting fee covers the cost of reviewing and evaluating your loan application.
Document Preparation Fee
The document preparation fee covers the cost of preparing the necessary loan documents.
Flood Certification Fee
The flood certification fee covers the cost of checking if the property is located in a flood zone.
Tax Service Fee
The tax service fee covers the cost of monitoring and reporting property tax payments.
Third-Party Fees
Third-party fees are fees charged by entities other than the lender. These fees include:
Title Search and Insurance
The title search fee covers the cost of searching public records to ensure the property’s title is clear. The title insurance fee covers the lender’s and owner’s title insurance policies.
Escrow Fees
Escrow fees cover the cost of the escrow agent’s services, including handling the transfer of funds between the buyer, seller, and lender.
Notary Fees
Notary fees cover the cost of having documents notarized.
Recording Fees
Recording fees cover the cost of recording the deed and mortgage with the county or local government office.
Pest Inspection
The pest inspection fee covers the cost of a professional inspection for pests or termites.
Survey Fee
The survey fee covers the cost of a professional survey of the property’s boundaries and structures.
Prepaid Expenses
Prepaid expenses are costs that need to be paid upfront as part of the closing process. These expenses include:
Property Taxes
Property taxes are typically paid in advance for a certain period, depending on the time of year.
Homeowner’s Insurance
Homeowner’s insurance is required to protect your home and belongings. The lender may require you to pay the first year’s premium upfront.
Mortgage Insurance
If you make a down payment of less than 20%, you may be required to pay mortgage insurance. This is an insurance policy that protects the lender in case you default on your loan.
Interest
You may be required to pay the interest on your loan from the date of closing until the end of the month.
Escrow Account Funding
An escrow account is an account set up by the lender to collect and disburse funds for expenses such as property taxes and insurance. At closing, you may be required to fund this account with enough money to cover the first few months’ worth of expenses.
Government Fees
In addition to the lender fees, third-party fees, and prepaid expenses, there are also some government fees associated with USDA loans. These fees include:
USDA Guarantee Fee
The USDA guarantee fee is a one-time fee paid to the USDA to guarantee the loan. The fee is a percentage of the loan amount and is typically rolled into the loan.
Upfront Mortgage Insurance Premium
USDA loans require upfront mortgage insurance, which is a one-time fee paid at closing. The amount of the premium is a percentage of the loan amount and is typically rolled into the loan.
Average Closing Costs for a USDA Loan
The total closing costs for a USDA loan can vary based on factors such as the loan amount, location, and specific lender fees. On average, USDA closing costs can range from 2% to 5% of the loan amount.
Factors that can influence the closing costs include the property’s purchase price, the borrower’s credit score, and the specific lender’s fees and policies.
Closing Cost Assistance
If you are concerned about covering the closing costs for your USDA loan, there are several options for assistance:
USDA Seller Concessions
The seller of the property may agree to pay a portion or all of the closing costs as part of the negotiation process.
Gift Funds
You may be able to receive gift funds from a family member or other eligible source to help cover the closing costs.
Down Payment Assistance Programs
There may be down payment assistance programs available in your area that can help cover some or all of the closing costs.
Negotiating Closing Costs
It is possible to negotiate some of the closing costs associated with a USDA loan. Here are some strategies to consider:
Understanding the Loan Estimate
Review the Loan Estimate provided by the lender, which details the estimated closing costs. Understand each item and ask questions about any fees that seem unclear or excessive.
Comparison Shopping
Obtain quotes from multiple lenders to compare the fees and closing costs they offer. This can give you leverage to negotiate with a preferred lender.
Asking for Lender Credits
Lender credits are a way to offset closing costs by raising the interest rate slightly. By accepting a slightly higher interest rate, the lender can provide a credit that reduces your closing costs.
Conclusion
When obtaining a USDA loan, it is important to understand the closing costs associated with the loan. These costs can include lender fees, third-party fees, prepaid expenses, and government fees. By understanding the various fees and expenses, you can budget appropriately and explore options for assistance or negotiation. Remember that closing costs can vary depending on factors such as the loan amount, location, and specific lender policies. With proper planning and research, you can navigate the closing process with confidence.
