How Much Are Closing Costs on a USDA Loan?

A USDA loan is a mortgage program designed to assist low-to-moderate income individuals in purchasing homes in eligible rural areas. This government-backed loan often includes no down payment requirements, making homeownership accessible. Understanding the closing costs associated with a USDA loan is important, as these represent a significant financial component of the home purchase. This article explains the different closing costs involved and how borrowers can manage these expenses.

Itemized Closing Costs for USDA Loans

Closing costs are fees and expenses paid at the conclusion of a real estate transaction. For USDA loans, these include USDA-specific fees, lender charges, third-party service fees, and prepaid expenses.

USDA loans feature two specific guarantee fees. The upfront guarantee fee is a one-time charge, typically 1% of the loan amount. This fee is often financed directly into the loan balance, reducing the immediate cash needed at closing.

An annual fee, also known as the annual guarantee fee, is an ongoing charge of 0.35% of the outstanding principal balance. It is usually collected through monthly mortgage payments.

Mortgage lenders charge various fees for originating and processing the loan. These include an origination fee for setting up the loan, an underwriting fee for evaluating creditworthiness, a processing fee for managing paperwork, and a credit report fee.

Third-party service providers also charge fees. The appraisal fee covers a professional property valuation. Title insurance protects the lender and homeowner from future claims against the property’s title. Fees for a title search and examination verify clear ownership and identify any liens.

Other third-party costs include escrow or settlement fees, paid to the company facilitating closing and holding funds. A survey fee may be necessary for property boundaries. Recording fees are paid to the local government to officially record the deed and mortgage documents. In some states, attorney fees are also required for legal representation during closing.

Prepaid expenses and initial escrow deposits constitute a portion of closing costs. These amounts are paid at closing to cover future expenses or to establish an escrow account for ongoing property costs. This includes a pro-rated portion of property taxes and an initial deposit for future tax payments. The initial premium for homeowner’s insurance is also paid at closing, often for the first year, along with an initial deposit for future premiums. Interest is prepaid from the closing date through the end of the month, calculated daily.

Estimating and Disclosing USDA Closing Costs

Borrowers receive detailed information about closing costs through standardized disclosure documents. These documents provide transparency, allowing borrowers to compare estimates and final figures. The process begins with an initial estimate and concludes with a final statement of costs.

The Loan Estimate (LE) is the first document borrowers receive, typically within three business days of submitting a mortgage application. This estimate provides a breakdown of anticipated closing costs, including origination charges and services the borrower can or cannot shop for. It allows borrowers to understand the estimated financial commitment before proceeding with the loan.

The Closing Disclosure (CD) provides the final, actual closing costs. Borrowers must receive this document at least three business days before the scheduled closing date. The CD details all transaction costs, loan terms, projected monthly payments, and a final accounting of all fees. Borrowers should compare the CD with the Loan Estimate to identify any significant changes.

Certain fees on these disclosures are subject to tolerance limits, governing how much they can increase between the LE and the CD. Some fees, like the lender’s origination charge, have a zero-tolerance limit, meaning they cannot increase from the estimate. Other fees, such as those for third-party services where the borrower can shop, typically have a 10% tolerance limit. Understanding these levels helps borrowers identify if a lender has overcharged.

Strategies to Cover USDA Closing Costs

While USDA loans offer no down payment, borrowers are still responsible for closing costs. Several strategies can help reduce the out-of-pocket burden, making homeownership more attainable.

Seller concessions offer a significant way to cover a portion of a buyer’s closing costs. USDA loan guidelines permit sellers to contribute up to 6% of the home’s purchase price towards these costs. These concessions can cover various eligible expenses, such as lender fees, appraisal costs, and prepaid property taxes or insurance. The specific amount is typically negotiated between the buyer and seller and included in the purchase contract.

The USDA upfront guarantee fee (1% of the loan amount) is almost always financed directly into the loan. This reduces the immediate cash requirement at closing, though the principal balance increases slightly.

Lender credits present another option for reducing closing costs. A borrower may agree to a slightly higher interest rate in exchange for a credit from the lender, applied directly to closing costs. Borrowers should evaluate if the long-term cost of a higher interest rate outweighs the immediate benefit of reduced closing costs.

Gift funds from eligible sources can also cover closing costs. Family members, non-profit organizations, or employers are common acceptable sources. Proper documentation, such as a gift letter stating the funds are a gift and not a loan, is typically required. These funds provide a direct infusion of cash to meet closing cost obligations.

Some closing costs may be negotiable, though this varies by fee and local market practices. Fees for certain third-party services, like attorney fees or specific settlement charges, might be open to negotiation. While many fees are fixed, borrowers can inquire about potential flexibility.