What USDA closing costs can be included with your loan?
A common question that I receive is whether you can “roll-in” your closing costs with a USDA loan because many have heard through second hand sources that closing costs are automatically included with your USDA loan.
However, in today’s short video I will discuss what USDA closing costs can be included in your loan and further explain this unique feature of the USDA loan program.
Before we get started, please download our USDA Blueprint for Success. This free guide breaks down the USDA mortgage process step by step. It’s a great educational resource for both realtors and home buyers!
What USDA closing costs can be included in your loan?
Customarily, a home buyer has to prepare for two types of out-of-pocket expenses:
- Down Payment;
- Settlement charges (also known as closing costs and pre-paid items).
While a USDA loan eliminates the need for a down payment, remember that the homebuyer is still responsible for the other respective costs. This can be either paid by using their own funds, eligible gift funds, negotiated for the seller to pay through the sales contract, or in the case of a USDA home loan, the possibility to finance those costs into the loan.
USDA Closing Costs
USDA loans are sought after by homebuyers for their qualifying flexibility and no down payment feature.
Additionally, because USDA loans permit financing up to the appraised value, this will allow for USDA closing costs to be included within your loan, but only in those cases where the appraised value is higher than the agreed-upon sales price.
When the appraised value is higher than the sales price these settlement charges can be financed into a USDA loan:
- Closing Costs such as Title Charges, Loan Costs, Survey, Recording Fees, etc.
- Pre-Paid Items such as your Escrow Accounts, Homeowner’s Insurance Premium, and Pre-paid Interest.
The key point to remember is that the appraised value must be higher than the sales price for this feature to be available.
If the home doesn’t appraise for more than the sales price and the buyer is counting on financing in their closing costs, then the buyer will either:
- Have to pay for the costs out of pocket; and/or
- Renegotiate with the seller to pay for their cost
A Word of Caution
Homebuyers should proceed with caution if they are solely relying on financing closing costs to cover their out-of-pocket expenses. Instead, financing closing costs should be viewed as a potential advantage, not a guarantee! This is because the final appraised value happens after the sales contract is agreed upon.
Remember, the home must appraise for more than the sales price in order to take advantage of the ability to finance USDA closing costs.
USDA guidelines can feel overwhelming, but that is why you have the Metroplex team in your corner. Our USDA experience and knowledge are available to answer your questions about USDA closing costs or any other loan questions.
Plus, use our free Second Opinion Service (SOS) for an expert opinion which can be especially helpful for those with recent loan denials or if you need guidance on how to make the most of your USDA home loan qualification.