One downside to any mortgage program is the closing costs. They can add a significant expense to an already expensive process. Even though the USDA mortgage does not require you to make a down payment, you still have to consider the costs of moving and turning on your utilities. In order to keep the USDA program affordable, the program does allow you to roll the costs pertaining to closing into your loan as long as you meet certain requirements.
The largest obstacle to including your closing costs in a USDA mortgage is the appraisal. This important factor in the loan process not only determines if the home qualifies you for USDA financing, but it also determines what costs you can roll into the loan. The property must pass a standard USDA appraisal and not exceed the average value for the area in order to qualify. If you want to include your closing costs in the loan, however, the value of the home must exceed the purchase price. The USDA allows homebuyers to borrow up to 100% of the value, not the purchase price, of the home.
The Debt Ratio
Another factor which affects your ability to roll the closing costs into your USDA loan is your debt ratios. The maximum USDA debt ratios equal 29% up front and 41% on the back-end. If your principal, interest, real estate taxes and homeowner’s insurance exceed 29% of your qualifying income or your total debt exceeds 41% of your monthly income, the closing costs may push you over the edge. The USDA is flexible with its guidelines, however, so if you have borderline ratios, do not think you will not be eligible.
The Other Options for Closing Costs
If the home does not have a high enough value or the addition of closing costs pushes your debt ratio beyond the limits, you do have a few other options:
- Negotiate the closing costs with the seller – There are several ways to do this. The seller can contribute up to 6% of the costs to close the loan out of his own pocket. Some sellers will do this as a courtesy in order to sell the home. Other sellers require you agree to a higher purchase price and then they apply the extra money towards your costs.
- Ask the lender for a no-closing-cost loan – The lender can also help you pay for your loan. If you opt for the no-closing-cost loan, you agree to a slightly higher interest rate. Each lender adjusts the rate as they see fit, so shopping around can help you find the lowest rate. The lender makes up for the costs they waive with the additional premium they receive with the higher interest rate.
Standard USDA Closing Costs
USDA loans are for low-income families, so the closing costs are usually affordable. The USDA oversees these costs and does not let lenders overcharge borrowers. The most typical costs are as follows:
- USDA Funding Fee – This fee is the same across the board. It equals 1.0% of your loan amount. If your loan amount equals $100,000, your funding fee equals $1,000, which you pay at the closing or roll into your loan amount if you are eligible.
- Origination Fee – Most lenders charge this fee to cover the costs they incur to process and underwrite your loan. The fee can range between 1-2% of the loan amount.
- Credit Report Fees – The lender can charge you for any charges they incur to pull your credit
- Processing Fee – This covers the cost of processing your loan application and obtaining the necessary documents to get your loan into underwriting
- Appraisal Fee – The third-party appraiser charges this fee to perform your appraisal and write up the appraisal report
- Title Fees – The title company charges fees to perform a title search to ensure there are no liens on the property as well as for title insurance to protect you and the lender against any unforeseen issues in the future.
- Recording, Notary and Tax Service Fees – These are also third-party fees charged by the title company and the county to properly document your deed.
There are also miscellaneous fees lenders may charge on a USDA loan. The fees must always be within reason and approved by the USDA, though. In fact, the USDA oversees the entire process. Once the lender underwrites and approves your loan, they send the package to the USDA for final approval. If there are fees outside of the usual and customary fees for the area, the USDA will not allow them.
If you do not have the money to cover 3-6% of the loan amount in closing costs and the USDA Funding Fee, you need to determine how you will pay them. If you know the area and can purchase the home for less than it is worth, the USDA will allow you to roll the costs into the loan. If not, you will have to use your negotiating skills with the seller and/or the lender to get your costs covered.