USDA loans: Guide to down payment and closing costs
Home buying with no down payment
One of the biggest barriers to homeownership is the required down payment.
That roadblock doesn’t exist with USDA loans.
It is one of only two major products requiring no down payment, the other being the VA loan, for which you need eligible military service.
With a USDA loan, though, you only need to find a home in an eligible location — which is currently about 97% of U.S. land mass.
Have no money to buy a home? This mortgage solution could be your ticket to homeownership.Verify your USDA loan eligibility (Sep 22nd, 2019)
How much are USDA closing costs?
USDA mortgages require no down payment. Compare that to an FHA loan for which you need 3.5% down, and a conventional loan that requires 3-5% down.
For a $200,000 home loan, the following down payments would apply.
|Loan Type||% Down||Down Payment|
Even though 0% down is required, you will still need to come up with closing costs, which could total thousands of dollars.
Closing costs come in two categories:
- Costs to acquire the loan and transfer title
- Expenses associated with the property
Typically, costs to acquire the loan and home vary by lender and company, which expenses tied to the property don’t change no matter where you get a loan.
Costs to acquire the loan and property
These costs include lender and title fees and can vary by provider.
- Loan origination fees: 0-1% of the loan amount
- Underwriting/processing/admin fee: $500-$1,000
- Credit report/misc. lender fees: $300
- Appraisal: $300-$500
Title and escrow fees
- Escrow fee: $500
- Title fee: $500-$1,000
- Signing fee $100
- County recording/misc. title and escrow fees: $300
Expenses associated with the property
Certain expenses are required any time you own a home. When you get a mortgage, the lender will require that you prepay a certain number of months of these expenses.
They do this to ensure that your home is not in jeopardy of being seized by the government, in the case of unpaid taxes, or at risk of being destroyed with no insurance.
- Property taxes: typically around 1% of the property value per year
- Homeowner’s insurance: $500-$1,000+ per year, depending on home value.
The lender will require the following amounts to be collected with other closing costs when you finalize your loan.
- 4-8 months of property taxes
- 12-14 months of homeowner’s insurance
For instance, your home value is $200,000 and your property taxes are 1% per year. Plus, your homeowner’s insurance is $600 per year. The lender would collect approximately:
- $1,000 in prepaid taxes (6 months)
- $700 in prepaid insurance (14 months)
After collecting the fees, the lender sends payment to the county tax office and your insurance company. They handle these payments to ensure the items are paid in full. Read all about escrow accounts here.
Expenses like a home inspection and home warranty are a good idea, but not required or collected by the lender.
More articles in the USDA loan series:
- Part 1: USDA Process and Timeline
- Part 2: USDA Income Eligibility
- Part 3: Eligible USDA Geographic Areas
- Part 4 (this article) Down Payment and Closing Costs
- Part 5: USDA Credit Score Eligibility
Use these strategies to pay for closing costs
The good news is that you don’t have to pay USDA mortgage closing costs out of your own pocket.
A little-known USDA guideline says you can take a bigger loan amount to pay for closing costs, if the appraised value is higher than the purchase price. For instance:
- $200,000 sale price
- $205,000 appraised value
- $5,000 extra loan amount available
Other ways to pay closing costs are as follows.
In some markets, the seller can “kick in” extra money for closing costs. Seller credits are typically available when a motivated seller is not getting many offers on the home.
The lender can raise your rate slightly and credit you the extra profit from that higher rate. For example:
- 4.0%: No lender credit
- 4.25%: $3,000 lender credit
That money can be used for all lender, title, escrow fees as well as property taxes and insurance
You can receive financial assistance from a family member, employer, or other eligible sources to pay all or part of your closing costs.
Check your USDA eligibility
USDA financing removes traditional barriers to homeownership. Many home buyers must come up with a down payment and closing costs, but USDA buyers eliminate a big part of that total.