USDA closing costs: what you pay and how to cover them

What you will pay

Your Loan Estimate lists closing costs in sections. On a USDA loan, expect:

• Loan costs (sections A to C): origination charges, the appraisal, credit report, title services and any inspections the lender requires.
• Other costs (sections E to H): recording fees and transfer taxes, prepaid items such as homeowner's insurance and interest, and the initial deposit to your escrow account.
• The upfront guarantee fee, which USDA charges on every guaranteed loan and which is usually added to the loan.

USDA's handbook says closing costs must be reasonable and customary for the area and cannot exceed what the lender charges for similar loans such as FHA-insured or VA-guaranteed mortgages.

Financing closing costs: the appraisal decides

Closing costs are an eligible use of USDA loan funds. But 7 CFR 3555.103 caps the loan at the lesser of two figures:

1. The market value from the appraisal, plus the upfront guarantee fee.
2. The purchase price plus all eligible acquisition costs.

Because of the first cap, you can only finance closing costs to the extent the appraisal comes in above the price. If the home appraises exactly at the price, the loan can cover the price and the guarantee fee, but not the other closing costs.

Seller concessions: up to 6%

The loan restrictions in 7 CFR 3555.102 bar purchases where the seller or another interested party contributes more than 6% of the sales price toward the buyer's financing costs, closing costs, escrow accounts, furniture or other giveaways, unless USDA provides otherwise. USDA's handbook adds detail:

• Contributions must be for an eligible loan purpose.
• Costs the lender pays through premium pricing, seller-paid funds for repairs and the buyer's real estate commission paid by the seller do not count toward the 6% limit.
• Seller funds for repairs must be held in escrow.
• Seller contributions cannot pay your personal debts or buy personal property such as furniture or cars, though typical household appliances are fine.

On a $250,000 price, 6% is $15,000, which is often more than enough to cover all closing costs and prepaids. Concessions cannot exceed your actual costs.

Gifts and lender credits

Gifts from family can help with closing costs. USDA's July 2024 handbook update said gift funds do not have to go into your account first; they can be sent directly to the title company, documented with a gift letter and the Closing Disclosure or a copy of the transfer.

A lender credit lowers your closing costs in exchange for a higher interest rate. That trade can make sense if you plan to sell or refinance within a few years, but it raises your payment for as long as you keep the loan. Compare both versions on Loan Estimates.

The guarantee fee and annual fee

USDA sets the upfront and annual fees each fiscal year within limits in the regulation. For fiscal year 2027, USDA's notice set them at 1.00% upfront and 0.35% a year. The annual fee is paid monthly and runs for the life of the loan. Use the calculator to see the fee on your base loan.

Cash you will still need

Even with financing and concessions, keep some cash. Earnest money, the appraisal and inspection fees are often paid before closing. And if the appraisal comes in at the price and the seller will not contribute, every closing cost is yours to pay.

The bottom line

USDA lets you cover closing costs through the loan, seller concessions up to 6%, gifts and lender credits, but the loan can only finance costs when the appraisal exceeds the price. Get a Loan Estimate early, negotiate concessions within the limit, and plan for some cash in case the appraisal leaves no room.