USDA loans are a great loan for rural homebuyers. Don’t let the term ‘rural’ fool you, though. A large majority of the United States properties are eligible for USDA loans. With no down payment required and flexible guidelines, it’s a great loan for those that don’t qualify for any other type of financing.
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Despite the no down payment requirement, USDA loans still have closing costs. All loans have costs, that’s how lenders make money and how they are able to process the loans. Lender fees, third-party fees, and prepaid fees are typical of even USDA loans. Typically, USDA loans have closing costs of 3% to 5% of the loan amount.
What if you can’t pay the closing costs? Does the USDA allow sellers to help you?
How Seller Concessions Work
Sellers can help with the closing costs associated with the loan. Sellers contribute up to 6% of the loan amount in seller concessions.
Sellers are often willing to help with the closing costs and other prepaid expenses in order to get the loan closed. If they are operating in a buyer’s market where there are few buyers and many sellers, homeowners often have to take that extra step to get the home sold.
When a seller helps with the closing costs, it sounds like they are paying the closing costs for you, but in reality, you wrap it into your loan amount. Here’s how it works.
You bid $100,000 for a home. The seller accepts it. Then you decide that you need help with the closing costs and prepaid expenses. You ask the seller for assistance. He agrees to pay $5,000 of your closing costs for you if you raise the bid to $105,000. This means you borrow $105,000 to buy the home, but the seller pays $5,000 of your closing fees. The seller still makes $100,000 on the sale (minus his own fees), but you had to bring less money out of pocket to cover the closing costs. You now have a $105,000 loan rather than a $100,000 loan.
What Closing Costs Should you Expect?
The USDA has closing costs just like any other loan. Each lender differs in what they charge. But in general, expect the following closing costs from the lender and third-parties
- Credit report
- Origination fees
- Underwriting fees
- Title insurance
- Appraisal fees
- Attorney fees
- Flood certification
- Recording fees
- Transfer tax
The USDA also charges an upfront guarantee fee. You pay this fee at the closing. If you can’t afford it and can’t get seller assistance, you may wrap it into the loan amount. Today, the fee is 1% of the loan amount.
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Other Ways to Get Help with Closing Costs
If your seller isn’t willing to help with the USDA closing costs, you can ask the lender to help. Some lenders offer what’s called a ‘no closing cost loan.’ Again, like the seller concessions, in the end, you pay the closing costs, just not at the closing.
The lender will charge you a higher interest rate in exchange for covering your closing costs. For example, if the lender quoted you a 4.5% interest rate with closing costs, they may quote a 5% rate for no closing costs.
The lender uses the extra interest earned on your loan to make up for the closing costs they paid. This seems like a viable option, especially if you don’t have to come up with the cash at closing, but know that the loan will cost you more over its lifetime. You’ll pay a higher interest rate over 30 years, if you keep the loan for its entire term.
Splitting the Difference
If you have some money to bring to the closing, but it’s not enough to cover all of the closing costs, talk to your seller. You may be able to negotiate help with half of the closing costs. This helps you get the loan you need without going over budget.
Don’t forget, you’ll also have to cover your prepaid taxes and insurance. All USDA loans have an escrow account. You’ll need the money to put into the escrow account to make sure there are adequate funds to pay your taxes and insurance when they come due.
The USDA loan is one of the most flexible loans on the market. Talk to your lender and seller about your options for help with the closing costs. With no down payment requirement and seller concessions, you’ have a good chance of coming to the closing table with little cash in hand.
