USDA Loan Closing Costs. Who Pays the Hidden Costs?

You have found a property in rural America that meets your household income needs and fits your budget. Before finalizing the deal and buying the house, it’s good to know the closing costs and fees that you will need to pay for the USDA loan program to be processed.

USDA home loans, backed up by the Department of Agriculture, come with favorable terms, lower interest rates, and no down payment. These make homeownership more accessible for first-time buyers and help people make a home purchase come true. However, USDA closing costs can often reach a few thousand dollars, so you should keep them in mind to avoid finding yourself in a bind. 

Understanding USDA Loan Closing Costs

USDA Origination Fee

The mortgage lender charges this fee for processing the loan. It typically ranges from 1% to 2% of the loan amount. This fee covers the administrative work of evaluating and approving the loan application.

Appraisal Fee

An appraisal is necessary to determine the market value of the property. Your mortgage lender wants to verify that they are not lending you more cash than the property is worth, providing an equal housing opportunity. The appraisal process confirms that the loan amount does not exceed the home’s value. Appraisal fees generally range from $500 to $800, depending on the real estate’s location and complexity.

Discount points

Discount points, often referred to simply as “points,” are a type of prepaid interest that borrowers can choose to pay at closing to reduce the interest rate on their mortgages. Each point is equal to 1% of the loan amount and can lower the interest rate by approximately 0.25%, although the exact number can vary depending on the lender and market conditions. If you choose discount points, you will pay less in interest throughout the home loan repayment period.

Credit Report Fee

The lender will check the borrower’s credit history to assess their creditworthiness. Pulling a credit score report usually costs between $25 and $100.

Home Inspection Fee

While not always required, an inspection is highly recommended when buying a home to identify any potential issues with the property. Inspection fees typically range from $300 to $500. An inspection will tell you whether something is wrong with the property, such as a roofing problem, pest infestation, or insulation issues. Obviously, you want to know about such issues before you purchase a home!

Title Insurance

Title insurance protects both the lender and the buyer against any claims or disputes over the property’s ownership. The cost can vary but generally falls between $500 and $1,000.

Recording Fees

These fees are paid to the local government to record the new mortgage and deed and make the transaction a matter of public record. Recording fees can range from $50 to $250.

Attorney Fees

In some states, an attorney must review the closing documents. Attorney fees can vary widely, from $500 to $1,500, depending on the complexity of the transaction and the local rates.

Interest

Interest accrues before the first mortgage payment is due. This depends on the amount you are borrowing and the interest rate your lender is charging you.

Property expenses

Aside from the closing costs, keep in mind the following expenses that are likely to come up.

Homeowner’s Association (HOA) Fees

If the property is part of a community with a homeowner’s association, there will likely be monthly or annual HOA fees. These fees cover the maintenance of common areas, amenities, and sometimes services like trash removal or landscaping. HOA fees can vary widely depending on the community and its amenities.

Homeowners Insurance

This insurance protects your home and personal property against damage or loss from unfortunate events such as fire, theft, or natural disasters. The cost of homeowners insurance varies based on the value of the home, the location, and the level of coverage. It is typically paid annually or included in monthly mortgage payments through an escrow account.

 Property Taxes

Property taxes are assessed by local governments and are usually based on the assessed value of the property. The amount can vary widely depending on the location and the property’s value. Property taxes are often paid annually or semi-annually and may also be included in monthly mortgage payments through an escrow account.

Who pays closing costs on a USDA loan?

Buyer

The buyer is often responsible for a portion of the loan closing cost. This can include fees for loan origination, appraisal, home inspection, title insurance, recording fees, mortgage insurance, and prepaid expenses such as homeowners taxes insurance and property taxes.

However, USDA home loans allow for some flexibility in how these costs are handled, and there are ways to minimize out-of-pocket expenses for the buyer.

Seller

In many cases, sellers can contribute to the buyer’s closing costs. USDA guidelines allow a seller to cover up to 6% of the loan amount towards the buyer’s closing costs. This contribution can be negotiated as part of the purchase agreement and can significantly reduce the financial burden on the buyer.

Lender

Some lenders may offer to cover part of the mortgage closing costs in exchange for a slightly higher interest rate on the loan. This arrangement, known as a lender credit, can help reduce the amount of money the buyer needs to bring to the closing table.

A home’s purchase should weigh the long-term cost of a higher interest rate against the immediate savings on closing costs.

Financing Closing Costs

USDA loans also provide the option to finance certain payments and closing costs into the loan amount if the appraised value of the property is higher than the home purchase price. This means that if the home appraises for more than what the buyer is paying, the difference can be used to cover some of the closing costs, reducing the amount the buyer needs to pay upfront. In this case, the closing costs can be rolled into the loan itself and paid over the lifetime of the USDA loan.

Hidden Costs with USDA Loan

Apart from the closing costs, the buyer might also need to pay some extra expenses, such as:

• Homeowner’s Association Fees (HOA) if the house is part of a homeowner’s association. These fees, paid monthly or annually, cover amenities or other community services.
• Homeowner’s insurance, which protects the house from potential damage or loss against unforeseen events (natural disasters, fire, theft).
• Property taxes, which can vary depending on the location and the property’s value. 

Grant Programs and Payment Assistance Programs

Some buyers may qualify for grant programs, down payment, or closing cost assistance programs that can help cover the overall costs. These programs vary by state and locality, and eligibility requirements differ, but they can be a valuable resource for reducing the total cost of buying a home.

USDA loans — closing costs

You may be able to pay closing costs for USDA loans through various means. One option is to roll your closing costs into the loan if the property’s appraised value is higher than the purchase price. Another one is to have the seller cover closing costs, which can be negotiated during the purchase agreement. Finally, some lenders may cover part of the closing costs in exchange for a slightly higher interest rate. 

USDA mortgage loans offer the advantage of no down payment and low interest rates. Closing costs and fees still need to be carefully considered and planned for. 

Are you a first-time home buyer and want to buy a house in a rural or suburban area? Do you need to know more about the closing costs process? Our Society Mortgage loan officers are here to help you understand closing costs alongside taxes and insurance on your USDA home loan program and find the best way for you to integrate them into your budget.