What Is A USDA Loan?
USDA loans are a type of government-backed mortgage loan. The goal of the USDA’s loan program is to provide insurance for mortgage lenders so that they can offer mortgages to low- to moderate-income home buyers in eligible areas who might not qualify for mortgages otherwise. The USDA loan is a type of non-conforming mortgage, meaning it’s not a conventional mortgage backed by Fannie Mae or Freddie Mac.
What makes these loans so affordable? By design, you’re able to get one with a 0% down payment. However, just because you aren’t making a down payment doesn’t mean you won’t need to bring some cash to closing. Like all mortgages, USDA loans come with closing costs.
A USDA loan borrower’s household income can’t exceed 115% of their area’s median household income. It’s important to note that this is in contrast to other programs that only take into account the income of clients listed on the loan application. You can check whether your household meets this requirement by using the USDA’s income eligibility tool.
USDA loans are only offered in certain areas of the country: areas that the USDA defines as “rural.” However, you don’t necessarily have to live out in the country to qualify. As long as you don’t live in a city or directly outside of one, you may be surprised to find that you live in an eligible area for USDA financing.
You can use the USDA’s property eligibility map to find out if the property you’re buying is in an eligible area.
What Do USDA Loan Closing Costs Pay For?
When you get a mortgage, your closing costs are made up of all the fees and charges you’ll incur in the process of getting your loan and buying the home.
Traditional Closing Costs
Here are some of the closing costs you can expect to incur when taking out a mortgage, regardless of whether it’s a USDA loan or another type of mortgage loan:
- Home appraisal fee: When you get a mortgage, you’ll need to get the home appraised. During this process, an appraiser will inspect the home and factor in market conditions, including the sales prices of recently sold homes that are comparable to the subject property, to determine the home’s fair market value. The buyer typically pays for this service to be completed, and the cost will be included in their closing costs.
- Credit report fee: This fee accounts for the cost the lender incurred when they pulled the borrower’s credit report.
- Mortgage origination fee: This is the fee the lender charges to process and underwrite the loan. Underwriting is the process of verifying that the borrower qualifies for the loan.
Currently our Mortgage Origination Fee is ZERO for USDA Loans.
- Discount or mortgage points: When a borrower pays discount points at closing, they’re paying money to reduce their interest rate by a certain amount. This is an optional cost.
- Title insurance: Title insurance offers protection in case there are claims against the home’s title. Buyers will pay for a lender’s title insurance policy, which insures the lender against title claims on the home, as part of their closing costs. The seller often purchases the buyer’s title insurance policy, paying it as part of their own closing costs.
- Escrow fees: This covers the cost of utilizing an escrow account to hold funds that pass between the buyer and seller.
- Recording fee: This fee covers the cost to have your municipality update their public records to reflect the change in ownership of the home.
- Taxes and insurance: At closing, you may need to pay a homeowners insurance premium, a mortgage insurance premium and property taxes for the property you’re buying. USDA loans require that an escrow account be set up for these taxes and insurance payments.
These are some of the more common closing costs a buyer will incur, but your closing costs may differ depending on the details of your transaction.
USDA-Specific Closing Costs
USDA loans come with a fee called a “guarantee fee.” This guarantee fee is an upfront fee that is paid in lieu of mortgage insurance. It’s equal to 1% of the loan amount. However, borrowers don’t always have to pay this fee at closing; the USDA allows borrowers to finance the guarantee fee into their loan.
In addition to the upfront guarantee fee, USDA loans also come with an annual fee, which is equal to 0.35% of the loan amount.
If you think a USDA loan sounds right for you, you can apply for one today with Triangle Lending Group.
Get approved for a Purchase USDA Loan using the link below or call us at 855-258-LEND(5363)