The USDA home loan doesn’t require a down payment which keeps “cash to close” as low as possible. Typically, it’s the down payment that keeps many buyers from buying a home when they want but can’t because they need to save up for a downpayment. Certainly, a 100% loan like USDA helps. But there are closing costs associated with all mortgages, including the USDA program and they do need to be accounted for. From lender fees, appraisal, to title insurance, there are multiple third party services required in order to properly close a USDA home loan.
You can get a pretty good idea about how much your closing costs might be by speaking with a loan officer and ask for a loan estimate which will include an estimate for closing costs. Or you can simply get a general idea on how much you’ll need just by speaking over the phone. Most estimates might be something like “3%” of the sales price or something similar but you can get a more itemized list from a loan officer. If the sales price is $200,000 then closing costs could be $6,000.
Whatever the amount ends up being the lender will need to verify you have enough funds in the bank to pay for them. Lenders will ask for your most recent bank statements showing at least enough funds for closing costs in addition to a little left over. But what if someone finds a home and wants a USDA loan and doesn’t quite have the $6,000 needed?
One option is to have the seller pay for the costs. The USDA home loan allows the sellers to pay up to 6.0% of the sales price to cover closing costs. Typically, this is well enough to cover most transactions in which the buyers have no down payment and no closing costs. Whether or not the seller is willing to pay for those costs is open for negotiation but the sellers aren’t obligated to pay them on your behalf. Another option is to obtain a financial gift from a family member or qualified non-profit agency.
Did the property happen to appraise for more than the sales price? If so, USDA loans have a unique feature when the appraisal comes in high buyers can use the additional funds for closing costs. Let’s say the sales price of the contract is $200,000 but the appraisal is $206,000. With the USDA home loan, the buyers can borrow $206,000 instead of $200,000 and use the extra $6,000 for closing costs. With a conventional or FHA loan that can’t happen.
If you’re saving up to buy a home and are looking in a rural or semi-rural area you really should consider the USDA home loan. In addition to no down payment, the interest rates on USDA loan programs are very competitive and available in 15 and 30 year fixed rate terms. There are some qualifications you must meet such as how much money those living in the household can make as well as making sure the home is in an eligible area. The lender will require a minimum credit score, typically 620. You can learn more about USDA Rural Housing loans by contacting Coast 2 Coast Lending above.