Closing costs can add up quickly. Before you know it, you owe more than $5,000 just to close on your loan. For some people, this is not possible. One possibility for help with paying the costs is to get the seller’s help. Oftentimes sellers are willing to help in order to get the approval. If it means they can sell their home, they may be willing to provide financial assistance. This, of course, is as long as they still make a profit on the house. Luckily, this process is acceptable to the USDA with certain restrictions.
The Maximum Allowed Amount
Just how much does the USDA allow sellers to contribute to your closing costs? They have the most lenient requirements regarding this – right now the maximum is 6% of the selling price. For example, if your house costs $125,000, the seller can contribute $7,500. This does not mean your closing costs will equal that much, but if they did, you could negotiate with the seller to pay them for you.
It is important to understand, though, that the seller “paying” your closing costs really isn’t literal. In most cases, the seller increases the selling price of their house accordingly. This way you have the ability to wrap the closing costs into your loan without really doing that directly. By increasing, the selling price and crediting you back the closing costs, the seller walks away with the same profit and you do not have to bring any money to the closing.
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Maximizing the Contribution
You might wonder why the USDA maximizes the amount a seller can contribute. What if there are more closing costs than what the seller can provide according to USDA guidelines? The maximum was put into place in order to keep things on the “up and up.” Technically, seller contributions mean an interested party contribution. The seller obviously has an incentive for you to purchase the home – he wants to sell it. If he were to “bribe” you with money, you might be swayed to purchase a home you didn’t want to purchase. This is why the maximum amount is 6%. It is just enough to cover the closing costs without going overboard.
No Money can Exchange Hands
Under no circumstances can money ever exchange hands between the buyer and the seller directly. The title company or closing agent must have a hand in what happens. This way they can ensure that the money the seller provides you with goes directly to the closing costs. You cannot receive any money in your own pocket. This violates the interested party contribution regulations. Just because the maximum allowed contributions equal 6%, doesn’t mean you have to take the 6%. The rules state a max of 6% or the total amount of closing costs, whichever amount is lower.
The money the seller provides you cannot be used for anything outside of the closing costs. This means it cannot help with the down payment or to lower your principal balance. Any money not needed to help you close on the loan is not allowed.
The Standard Closing Costs
Following is a list of the typical closing costs you must pay with a USDA loan. This list might vary from lender to lender, but it gives you a general idea of what to expect:
- Origination fee
- Discount points
- Credit fees
- Processing fee
- Inspector fees
- Attorney fees
- Title Search
- Title Insurance
- Closing fee
These are the most common fees. You can negotiate most of the lender fees, such as the origination and discount fees. The appraisal, inspector, and title insurance fees are pretty set in stone, though. The more you shop around and negotiate, though, the lower you may be able to get your fees.
The seller can help you with any of these fees as they directly relate to the loan. In order to have the available funds to credit you the closing costs, you have to determine the value of the property. If the appraised value exceeds the agreed upon sales price, you can negotiate with the seller to pay your fees. What the seller does is increase the price of the home in order to credit you the fees. You obviously don’t want to increase the sales prices so much that it exceeds the value of the property, though. If this happens, you would have to pay the difference in cash – no lender can provide you funding for a loan that exceeds the appraised value.
Wrapping Closing Costs into the Loan
The USDA loan does have a unique aspect, however, most purchase loans do not allow you to wrap your closing costs into the loan, but the USDA loan does. The same scenario applies, though. You cannot wrap the costs into the loan if the appraised value does not exceed the sales price by the respective amount you need. If it does, you can wrap the costs into the loan, which works in much the same way as the seller increasing the purchase price of the home. How you manage it is up to you and the lender as they both have the same outcome.
Figuring out how to get your closing costs paid can be a very stressful part of the home purchase process. Luckily, the USDA makes it very easy. If you are unsure of the value of a home you wish to purchase, talk with your real estate agent to get his opinion. They often have a good idea of the general value of homes in the area. If the home you wish to purchase is worth more than what you will bid on the home, chances are you will be able to get help with the costs to close the loan. This leaves you in the great situation of not having to bring money to the closing. Without the need for a down payment and help with the closing costs, your USDA loan can get off to a great start.