Even though there is no down payment requirement for a USDA loan and you can roll your upfront guarantee fee into your loan amount, there are still closing costs that need to be addressed. When you buy a home and finance it with a USDA mortgage, you’ll soon encounter two primary types of closing costs—recurring and non-recurring.
A recurring closing cost, as the name implies, will happen again over time while a non-recurring closing cost is a one-time fee paid at the settlement table. Here are some examples for each type.
USDA Loan Closing Cost Types
Recurring closing costs are funds needed to pay for an insurance policy, for example. When you purchase an insurance policy, you pay for the entire year and once the policy is set to expire, you purchase another year. Property taxes are also a recurring closing cost and those are paid annually or semi-annually depending upon the location of the property.
With a USDA loan, you will also set up an escrow account to be paid toward your taxes and insurance. Each month when you make a payment, one-twelfth of your annual insurance and property tax is included. Later, when each becomes due, the lender who collects those funds each month pays the taxes and insurance on your behalf. Mortgage interest is also considered a recurring cost.
These are the various one-time fees that appeared on your settlement statement and include fees charged by your lender as well as third parties. A credit report fee is a non-recurring charge as is an appraisal. Common non-recurring lender charges might include a processing fee, underwriting or perhaps a document preparation fee.
Non-lender costs that fall into this category are escrow or settlement charges, title insurance and a host of others such as a survey or flood certificate. When your loan officer provides you with the initial closing cost estimate, you will be able to tell the difference between a recurring and non-recurring cost.
Who Pays USDA Loan Closing Costs
Generally the homebuyer pays the closing costs associated with the mortgage; however, in some instances, the seller may pay part, or all of the closing costs as part of the deal.
Seller Paid Closing Costs
The easiest way to avoid closing costs is having the seller pay them for you. Why would a seller do that? That depends. If the seller is really wanting to sell the property they might be inclined to take some of the sale proceeds and pay for your closing costs.
USDA guidelines allow sellers to pay up to 6% of the sales price toward your closing costs. That’s a substantial amount and sometimes that’s actually too much. On a $200,000 home, that amounts to $12,000. Use caution however, sometimes when a seller agrees to pay the maximum, the appraiser might lower the value, thinking the home couldn’t be sold without such a generous concession.
You’ll want to work with your agent on this approach and craft your offer accordingly. Using your closing cost estimate provided to you by your USDA lender, consider that amount when making your offer. Let’s say your closing costs are $6,000, that’s 3% of the sales price and within common guidelines. If the home is listed at $200,000, during the negotiations, ask the seller to pay your closing costs, up to say 3%. Sellers are concerned with their net proceeds not necessarily what the home sells for and the list price is most often a starting point. If the seller wants to net say $175,000 from the sale, it doesn’t matter if the seller agrees to pay 3% or not as long as the desired net is achieved.
Lender Paid Closing Costs
This takes a little math but a USDA loan officer can easily explain this option. This is why a “no closing cost” loan really does have closing costs, it’s just in the interest rate. For example, when you get interest rate quotes from your loan officer, you’re provided with a rate with no points and a rate with some amount of points. You can even have a rate quote with a half point. A point is one percent of your loan amount and will typically lower a 30 year USDA rate by 0.25%. Paying a point, or two, will lower your rate. You and your loan officer can decide whether or not paying any points at all makes sense by comparing the difference in monthly payment with the amount paid in points.
Now, lenders can also increase your interest rate and in exchange contribute an amount to your closing costs. Say your closing costs are $6,000 and a rate with no points is 4.00%. On a $200,000 loan, the principal and interest payment is $954. If you did pay a point, or $2,000, your rate might drop to 3.75 for a lower payment of $926.
Let’s now reverse this procedure and increase your rate from 4.00% to 4.25%. The lender now has a credit of approximately $2,000 to be applied to your closing costs. If the lender increased your rate to say 4.75%, you’re getting very close to a zero closing cost loan. However, the monthly payment at 4.75% jumps to $1,043, or $89 higher than a no-point rate. There is a closing cost, it’s just reflected in your interest rate.
Finally, you can combine both a seller and lender paid credit. You can do this for instance if the seller agrees to contribute a portion of the proceeds to your closing costs but not enough to cover all of them. In turn, your lender can calculate how much credit is needed to pay for your remaining fees in return for a slightly higher interest rate.
This is what happens when you hear advertisements or see an online ad about a “no closing cost” loan. All lenders can provide this option and not just for a USDA loan, either. By simply adjusting the interest rate, the lender can pay some or all of those fees for you.