Who Pays Closing Costs on a USDA Loan?

USDA loans offer a path to homeownership in rural and certain suburban areas. Like all mortgage transactions, USDA loans involve various expenses beyond the property’s purchase price, known as closing costs. Understanding who typically pays these costs is important for prospective homebuyers.

Components of Closing Costs

Closing costs encompass fees paid at the culmination of a real estate transaction. Typically, closing costs for a buyer range from 2% to 5% of the home’s purchase price.

Lender fees constitute a significant portion of closing costs. These include origination fees, which cover administrative costs of processing and underwriting the loan, often amounting to around 1% of the loan value. Other lender-related fees can include underwriting fees, appraisal fees (typically $500 to $750), and credit report fees.

Third-party fees are also incurred during closing. These often involve title insurance, which protects against defects in the property’s title, and can range from $800 to $1,500. There are also escrow fees, attorney fees in states where legal representation is required, and recording fees (typically $100 to $300) to officially register the property deed with the local government. Survey fees, generally $300 to $500, may also apply to verify property boundaries.

Prepaid expenses cover costs that are due at closing but relate to future property ownership. These commonly include initial property taxes, often $600 to $800, and homeowner’s insurance premiums, estimated at $700 to $1,200 for the first year. Prepaid interest, covering the period between closing and the first mortgage payment, is another common prepaid expense.

The Upfront Guarantee Fee (UFG) is a fee associated with USDA loans. This fee, typically 1% of the loan amount, serves a similar purpose to mortgage insurance on other loan types and can often be rolled into the loan itself. While an annual fee of 0.35% of the outstanding loan balance is also part of USDA loans, it is paid monthly as part of the mortgage payment and is not considered a closing cost.

Standard Division of Closing Costs

In typical real estate transactions, responsibilities for closing costs are generally divided between the buyer and the seller. Buyers commonly bear the expense of loan-related fees, including loan origination fees, appraisal fees, credit report fees, and the lender’s title insurance policy. Buyers also usually pay for prepaid expenses like initial property taxes and homeowner’s insurance premiums.

Sellers often cover costs associated with transferring the property. These commonly include real estate commissions, which are a significant portion of seller costs, and the owner’s title insurance policy. Transfer taxes, where applicable, are also frequently paid by the seller. In some instances, escrow fees might be split between buyer and seller.

The final allocation of closing costs is often determined through negotiation between the buyer and seller during the purchase agreement phase. Market conditions can influence these negotiations, with sellers potentially more willing to contribute to buyer costs in a buyer’s market. Many of these costs are negotiable.

USDA Loan Rules for Closing Costs

USDA loans feature specific rules and allowances regarding closing costs. A provision allows sellers to contribute to the buyer’s closing costs. Sellers can offer concessions up to 6% of the lesser of the sales price or the appraised value of the home. These contributions can cover a wide array of eligible closing costs, including loan origination fees, appraisal fees, title insurance, and prepaid property taxes.

USDA loans allow financing certain closing costs directly into the loan amount. Specifically, the Upfront Guarantee Fee (UFG), which is 1% of the loan amount, can be rolled into the principal loan balance. Other closing costs may also be financed into the loan if the home’s appraised value exceeds the purchase price. The total loan amount, including any financed closing costs, cannot exceed the appraised value.

Lenders sometimes offer credits to cover some closing costs. In exchange for these credits, borrowers typically agree to a slightly higher interest rate on their loan. This arrangement can reduce the cash needed at closing but may result in higher overall interest payments over the life of the loan.

Gift funds also provide a flexible option for covering closing costs on a USDA loan. Funds can be received from eligible sources, such as family members, employers, or charitable organizations. These funds must be a true gift, with no expectation of repayment, and proper documentation, including a gift letter and proof of transfer, is required.

While USDA loans offer 100% financing, eliminating the need for a down payment, closing costs are still a requirement. Closing costs for USDA loans typically range from 3% to 6% of the home’s purchase price.

Methods to Reduce Buyer Out-of-Pocket Costs

Buyers pursuing a USDA loan have several practical strategies to minimize their direct out-of-pocket expenses for closing costs. Negotiating seller concessions is a primary strategy. Buyers can propose that the seller contribute a portion of their closing costs, up to the USDA’s allowed limit of 6% of the sales price. This negotiation occurs during the offer stage and should be clearly outlined in the purchase contract.

Financing the Upfront Guarantee Fee (UFG) is another method to reduce immediate cash outlay. The UFG, 1% of the loan amount, can be rolled into the loan, removing a substantial upfront cost.

Utilizing lender credits can also help cover closing costs. Buyers can discuss with their lender the possibility of accepting a slightly higher interest rate in exchange for credits that offset some of their closing expenses. While this reduces cash needed at closing, it may result in higher overall interest payments. Buyers should evaluate the long-term cost against the immediate benefit.

Seeking gift funds from eligible sources provides a flexible way to cover closing costs. Family members, employers, or charitable organizations can provide funds specifically for closing expenses. These funds must be documented as a true gift with no expectation of repayment.

Comparing offers from different lenders and shopping for third-party services can yield savings. Lenders may have varying fees. Costs for services like title insurance and home appraisals can differ among providers. Requesting a Loan Estimate from multiple lenders allows for a direct comparison of fees.