Closing costs can be as much as 5-6% of a home’s purchase price. On a $150,000 loan, you’re looking at as much as $9,000. Even though you don’t need a down payment for the USDA loan, this is still a lot of money. What happens if you don’t have this much? Are you stuck renting for the rest of your life? Luckily, there are options. One way is letting the seller pay the closing costs. Here we will discuss how this may happen.
What are Closing Costs?
First, let’s look at closing costs. Many companies charge you for your loan. It’s not just the lender. You also have the title company, appraiser, attorney, credit reporting company, and the county. You may negotiate some fees, but not all.
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Here’s an example of the most common closing costs:
- Processing fee
- Discount points
- Origination points
- Underwriting fee
- Credit reporting fee
- Escrow fee
- Title search
- Title insurance
- Recording fee
- Attorney fee
- Appraisal
- Transfer tax
Each lender, servicer, and county charge different amounts. For example, some lenders charge processing fees while others don’t. Some lenders lump their closing costs into one origination fee. You may see this as a percentage of your loan amount. 1 point equals 1%. On a $150,000 loan, 2 points equals $3,000.
What Can Sellers Pay?
When sellers help with the closing costs, it’s called seller’s contributions. The seller contributes to your closing fees. Sellers can’t give you a lump sum of money, though. They may only pay actual closing costs. You must also negotiate this into the sales contract. You can’t decide after the fact that you want the seller to pay the fees. The seller usually wants to work the costs into the purchase price.
For example, let’s say you buy a home for $150,000. You know you need the seller to pay $5,000 in closing costs. The seller may ask to raise the sales price to $155,000. This way he makes the same profit but helps you buy the home. Without his help, you might not have closed on the loan. This is why the seller may only pay your actual closing costs. If he gave you $10,000, it would be like paying you to buy the home. This isn’t legal.
The USDA Requirements
The USDA allows borrowers to accept up to 6% of the loan amount in seller concessions. This is a hard and fast rule. Some mortgage rules have a little flexibility, enabling lenders to bend the rules, so to speak. This isn’t one of them. On the above $150,000 loan, you can only accept $9,000 at the most for closing costs.
Watch the Value of the Home
The largest factor in seller concessions is the value of the home. The seller will usually raise the sales price of the home to pay your closing costs. If the value of the home isn’t there, the seller can’t pay your closing costs. Under no circumstances can you borrow more than the home is worth. The only fee that may raise your loan amount slightly above its value is the funding fee. The USDA charges 1.0% upfront for a funding fee. On the $150,000 loan, this equals $1,500. You can wrap this fee into your loan without worrying about the LTV. You can’t roll any other costs in, though.
Why do Sellers Pay the Closing Costs?
Sellers pay the closing costs to help get the loan closed. They likely have a plan after selling their home. Paying the closing costs for you may help move this plan along. It is often the most beneficial in a buyer’s market. When there are many homes for sale, buyers have plenty of choices. Sellers willing to cover the closing costs often have a leg up on the competition. For example, let’s say you have a choice between 2 homes. One seller will pay the closing costs. The second seller will not. If the sales price is the same, you’ll need less cash out of pocket with the seller willing to pay the closing costs. It doesn’t cost the seller anything – he just must agree to credit the closing costs back at the closing.
Qualifying for a USDA Loan
Aside from the 6% seller concession rule, you’ll need to make sure you qualify for a USDA loan. First, you must make sure you are eligible based on your income. The USDA uses total household income. You can’t make more than 115% of the average income for the area. If you do, you’ll have to use other funding, such as FHA or conventional. If you don’t exceed the guidelines, you’ll need:
- 640 credit score
- 29% housing ratio
- 41% total debt ratio
- Steady employment
- No previous defaults on federal loans
The USDA has minimal guidelines and is often rather flexible. It’s the easiest way to buy a home in a rural area with little money out of your pocket. If you get the seller to pay the closing costs, you essentially wrap the costs into your loan. Keep in mind, this means more interest over the 30 years since you increase your loan amount. Consider all of your options before asking for a seller concession. If you do, though, it can be a great way to get into the house of your dreams.
