USDA Loan Down Payment and Closing Cost Guide
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October 28, 2022

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Does USDA require a down payment?

USDA loans do not require a down payment.

It’s one of only two major home loans that require $0 down.

This is welcome news for the millions of renters who find their biggest barrier to homeownership is the upfront cost. In fact, 26% of first-time buyers cite the down payment as their biggest hurdle, says the National Association of Realtors.

But just because there is no down payment for a USDA loan doesn’t mean it costs $0 to get into a home. Here’s what else to consider.

See if you qualify for a zero-down USDA loan.

What’s in this article?

About USDA closing costs
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USDA closing cost amounts
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How to pay for USDA closing costs
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Get a USDA closing cost quote
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No down payment; yes closing costs

All mortgage loans require closing costs.

To a first-time buyer, closing costs are typically a mysterious thing. What are all these costs and what are they for?

Opening a mortgage is a big process, and a lot goes into it. We’ll get into that later.

What’s important is that all these fees can add up to thousands of dollars, which is quite disappointing for new homebuyers who don’t have much saved up.

Fortunately, there are ways to pay for closing costs besides personal funds.

Before we explore how to pay for closing costs, let’s remove some of the mystery about what they are.

USDA closing costs: Mystery solved

Here are some of the most common closing costs you’ll see on your loan.

Appraisal: $500+ for a professional analysis on the home’s market value

Title: $500-$1,000+ to verify ownership of the home and insure against future claims of ownership

Escrow: $500+ for the escrow company to get all necessary signatures and disburse money to appropriate parties (seller, lender, county, etc.) at the end of the transaction.

Loan origination/processing/underwriting: 1% of the loan amount or more. It goes to the lender’s staff, which ensures the file complies with government and lending standards. These fees also generate profit for the lender, enabling it to stay in business and keep issuing loans.

Credit report: Around $50 to verify your credit history.

Recording: $100+ paid to the county to record new ownership in public records. This protects you from false ownership claims for your home.

USDA guarantee fee: 1% of the loan amount. This is not required in cash but can be rolled into the loan amount.

Prepaid taxes: This is a big one. Your lender will require that you pre-pay 6-9 months of property taxes at closing. If taxes aren’t paid, your county can seize the home. So, lenders make sure taxes are paid. For a home with property taxes of $300, this item could add up to $2,700 or more.

Prepaid homeowners insurance: The lender will require you to prepay around 15 months of homeowners insurance to ensure the home can be rebuilt if destroyed. If your insurance policy is $800 per year, this closing cost would equal $1,000.

How to pay for closing costs without your own money

We just discovered that closing costs aren’t cheap.

The good news is that, in some cases, you don’t have to pay them out of your own funds according to USDA loan requirements. Here are ways to pay for closing costs, even costs that you would pay even if you weren’t getting a loan like property taxes.

Down payment assistance

Despite the name, down payment assistance is not just for down payments. It can also be used to pay closing costs. For down payment assistance programs in your area, simply Google “down payment assistance in [state], [county], or [city].”

Begin your home purchase using a USDA loan.

Roll closing costs into the loan

In rare cases, the appraised value comes in higher than the purchase price. When this happens, you can take a loan for the appraised value and use extra funds to pay for closing costs.

Example:

  • Home price: $275,000
  • Appraised value: $280,000
  • Maximum loan amount: $280,000
  • Available for closing costs: $5,000

USDA is the only major loan type that allows financing closing costs in this way.

Gift funds

You can receive a gift from a relative or even a charitable organization to cover USDA loan closing costs. Rather than getting a wedding gift or other high-cost item from family, request a financial gift toward your closing costs.

Seller credit

When the seller has a hard time selling the home, they may offer incentives like a seller credit. For instance, a home is listed at $275,000 but isn’t selling. You can make an offer at $275,000 and request $5,000 in closing cost assistance. Sometimes, the seller will agree. In this case, you can use the whole seller credit toward closing costs and prepaid taxes and insurance up to the actual closing cost amount.

Tip: Seller, lender, and agent credits may not be taken in cash. You can only use what you actually have in closing costs and prepaid items.

Lender credit

In some cases, the lender can raise your rate, which generates more profit from the loan. The lender can then issue that extra credit as a closing cost credit. This doesn’t always work, and can make your rate quite high. Still, it’s worth exploring with your lender.

Real estate agent credit

The real estate agent typically makes 1-3% of the sale price as a commission (the seller pays this). It’s legal and rather common that the agent credits you some of his or her commission towards closing costs. As you look for an agent, negotiate an agent credit.

There’s no shortage of ways you can cover some or all of your closing costs employing these  strategies. With some little creativity, many buyers who use a USDA loan have purchased a home with little or no money out-of-pocket.

How much are USDA closing costs?

USDA closing costs are usually 2-5% of the loan amount, but can be paid for by a seller credit, lender or agent credit, down payment assistance program, or rolled into the loan when the appraised value is higher than the purchase price.

Does it cost $0 to buy a home with USDA?

No. Even though USDA loans don’t require a down payment, you still need funds to pay for closing costs. These funds can come from personal savings, a down payment assistance program, a seller credit, or another eligible source.

Why don’t USDA home loans require a down payment?

USDA loans are meant to encourage homeownership in rural and suburban areas so it offers easier qualification terms on its loans.

USDA loans offer no down payment and flexible ways to pay closing costs

The USDA loan offers many benefits beyond zero down payment. Low rates, lenient credit guidelines. Alternative ways to pay for closing costs are an added bonus.

Start your USDA loan by getting a personalized closing cost quote.

Get a USDA closing cost quote now.
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