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Are Closing Costs Included With A USDA Loan?

June 26th, 2015 by Sean Stephens

“Will my closing costs be included with a USDA loan?”

This is a very common question that we receive at Metroplex Mortgage Services, and in today’s video tip we will cover the details about how a USDA loan can offer flexibility with closing costs and help reduce out of pocket expenses.

USDA loans offer the benefit of 100% financing, or no Down Payment.  However, that should not be confused with No Money out of pocket.

When you are buying a home, there are customarily 2 sets of out of pocket expenses:  Your Down payment and Settlement Charges otherwise known as closing costs.

With 100% financing, USDA loans eliminate the need for a down payment, but that does not have anything to do with closing costs.

USDA loans provide for the ability to finance closing costs into the loan.  However,  In order to finance closing costs, the home must appraiser for more than the purchase price you have agreed to.  This feature is unique to USDA loans, and not available with conventional, FHA, or VA programs.

Examples of what charges could be financed with a USDA home loan are:

  1. Closing Costs such as Title Charges, Loan Costs, Survey, Recording Fees, etc.)
  2. Pre-Paid Items such as your Escrow Accounts, Homeowner’s Insurance Premium, and Pre-paid Interest.

For example, if your sales price is $100,000 and the appraiser determined the value of the home at $103,000, then the loan amount could increase up to the appraised value and include $3,000 of out of pocket settlement charges.

The one exception to this rule is for the 2% USDA Guarantee fee, which can always be financed into the loan amount regardless of the appraisal.

As always, the buyer can contribute their own funds at closing or if possible can also negotiate for the seller to pay up to 6% of the sales price towards a buyer’s settlement charges.

When trying to finance closing costs, it is important to remember that there is no guarantee of what the home will appraiser for so be sure not to put all of your eggs in one basket and hope for the best.

If you do need assistance with closing costs, it is critical to address this upfront with both your mortgage professional and Realtor – before a sales contract has been written.

As a summary, USDA loans do not automatically include customary out of pocket settlement charges, but through a combination of the buyer’s own funds, possible seller concession, and the ability to finance closing costs it allows for flexibility when budgeting for out of pocket expenses.

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