You don’t need a down payment for a USDA loan, but do you need money for the closing costs? Since closing costs can be as much as 5% of your loan amount, they really add up to a lot of money. What if you don’t have the money to pay the costs?
Rolling the Costs into Your Loan
The USDA loan is one of the few programs that does allow you to wrap your closing costs into the loan. But there’s one rule – the home must appraise for more than you agreed to pay for it. If the appraised value isn’t high enough to cover the closing costs, you can’t roll them into your loan.
Keep in mind that if there is room in your appraised value that you will increase your loan amount. Let’s say you agreed to pay $150,000 for the home, but the home appraised for $170,000. If the closing costs were $4,000, you could roll them into your loan.
What this means, though, is that you spread that $4,000 out over the 30-year term. You also pay interest on that $4,000. Over 30 years, you’ll pay a lot more than $4,000 for those closing costs. Also, remember that since you increase your loan amount, you also increase your monthly payment. Just make sure it’s a payment that you can afford.
Other Ways to Get Help With Your Closing Costs
If you don’t want to roll your closing costs into your loan or you can’t, you may be eligible for one of the following ways:
- Ask the seller to pay them – The seller can cover your closing costs, but you cannot receive any cash in hand. They can only pay the actual cost of the closing costs. Some sellers are willing to do this if they are having a hard time selling their home and if you bid the maximum price on the home.
- Ask the lender to pay them – Some lenders offer what they call ‘lender-paid closing costs’ or a ‘no closing cost loan.’ While this sounds odd because why would the lender pay your costs for you, there’s a catch. You’ll pay a higher interest rate for the lack of closing costs. Typically, you pay a 0.5% higher interest rate to avoid closing costs.
- Obtain gift funds – If you have a parent, employer, or charitable organization willing to help you buy a home, you can use the funds for the closing costs. Since you don’t need a down payment, the closing costs are the next best thing to use the funds on to help you buy your home.
You’ll find closing costs on any loan that you want, whether it’s a USDA, FHA, VA, or conventional loan. If you don’t have the funds to cover the closing costs, though, know that there are options to help you become a homeowner. Be open about your situation and your needs and see how you can get help with those closing costs.