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Down Payment & Closing Costs
There are numerous advantages to USDA home loans. If you and your home qualify for one of these loans, you will enjoy several unique benefits you simply will not find with other mortgage loans. Be sure and check out the rest of the articles in this series for additional information on USDA home loans:
Part 1: What is a USDA Home Loan?
Part 2: Income Limits
Part 3: Credit Score
Part 4: Property & Location Eligibility
Part 5: Loan Process & Timeline
Part 6: Qualifications for USDA Loans
Part 7: Mortgage Insurance & Interest Rates
Perhaps above all other benefits, the biggest appeal of a USDA loan is that it can provide up to 100% financing. Yes, you can buy a house with zero down payment!
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USDA Home Loans with Zero Down Payment
The down payment is often a significant hurdle for potential home buyers. This is especially true for buyers who have low-to-moderate incomes and/or live in an area where credit access is more limited. These are exactly the people who the United States Department of Agriculture want to help with USDA mortgage loans. If you live in a designated “rural” area and have moderate income compared to the area’s median income, then you may be eligible for a USDA home loan.
USDA home loans are one of only two loan types that require no down payment. The other is a VA loan, which is only available to active military personnel, veterans and surviving spouses. FHA loans typically require a 3.5% down payment. Conventional loans may require anywhere from 3-20%, depending on the loan, the lender and the borrower’s financial health.
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Should I Still Put Money Down?
What’s important to keep in mind about a USDA loan is that you may still want to put down some money if you can afford it. Though no down payment is required if you qualify, the benefits are even better if you put down even a small percentage toward the home purchase. The more you are able to pay down, the more you are likely to get even better interest rates. You will also be paying off more principal at the beginning, which will help reduce your overall private mortgage insurance (PMI) payments that will be required until at least 20% of the loan principal is paid off.
USDA Home Loans Closing Costs
You can qualify for USDA home loans with zero down payment. However, there are still closing costs associated with any mortgage loan. There are two categories of closing costs to understand:
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Costs to Acquire the Loan and Property
These are fees and charges associated with the lender and escrow company, required to process the loan and final contractual paperwork.
Lender Fees
- Loan origination fees (0-1% of loan amount)
- Underwriting/processing fee ($500-$1,000)
- Credit report/various lender fees (±$300)
- Appraisal ($300-$500)
Title & Escrow Fees
- Escrow fee (±$500)
- Title fee ($500-$1,000)
- Signing Fee (±$100)
- County recording/various title and escrow fees (±$300)
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Property Expenses
These are expenses related to ownership of the property itself. Lenders and the USDA will have requirements, including prepayment of a certain amount of property taxes and homeowner’s insurance.
- Property taxes (±1% of the current property value per year)
- Homeowner’s insurance (dependent on home value, usually $500-$1,000 per year)
Know Your Closing Costs and Options
How much your total closing costs are will vary from loan to loan and from lender to lender. Sometimes, the seller will agree to cover certain closing costs and, in some cases, some of the closing costs can be rolled into the loan and set up as escrow accounts that are replenished as monthly mortgage payments are collected. Obviously, this will increase your monthly payment amounts. It’s important to understand the closing costs and what you may need to pay upfront in order to get approved for your USDA loan. Just because there is no down payment required, it doesn’t mean there are no upfront costs associated with the mortgage loan or acquiring the property.
Talk with your lender to see if you qualify for a USDA loan and to get a full, detailed estimate of your down payment options, closing cost expenses and monthly mortgage payments. This way, you will know exactly what to expect and make sure you can afford your home purchase.
If you want to learn more about USDA Home Loans and other great mortgage loan options, contact Moreira Team to get started.