USDA Loan Down Payment & Closing Costs | 2024

Basics of USDA loan down payment and closing costs

One of the biggest barriers to homeownership is the required down payment. That roadblock doesn’t exist with USDA loans.

With no USDA loan down payment needed, these loans open doors for buyers without substantial savings.

However, while the USDA loan down payment is zero, you’ll still need to budget for USDA loan closing costs.

This article will guide you through both, helping you prepare for what’s required at the closing table.

In this article (Skip to...)

• How USDA works
• Down payment
• Closing costs
• USDA-specific costs
• Eligibility
• Tips to pay closing costs
• The bottom line

How the USDA loan program works

USDA home loans are guaranteed loans backed by the U.S. Department of Agriculture’s Rural Development Loan Program.

This loan option is designed to get low-to-average income families into homeownership in rural areas. As we’ve already mentioned, a major benefit of the USDA loan is that it requires no USDA loan down payment, which sets it apart from most standard mortgages.

In fact, it’s one of only two major products requiring no down payment. The other is the VA loan, for which you need eligible military service.

Unlike most standard home loans, the USDA loan is not a conventional mortgage backed by Fannie Mae or Freddie Mac.

Because the USDA home loan program is guaranteed by a government agency, lenders can often offer below-market mortgage rates.

USDA loan down payment requirements

In addition to lower-than-market mortgage rates, the appeal of a USDA loan is that no USDA loan down payment is required. And the USDA mortgage insurance is cheaper than many other low-down-payment loan programs.

This makes it an attractive option for homebuyers who may not have substantial savings for a down payment for a USDA loan.

Use a USDA loan calculator to estimate how much you can save with and without a down payment.

Regardless of which option you choose, you’ll still need to cover USDA closing costs.

However, for home buyers who want to buy with as little out-of-pocket expenses as possible, there are a few common strategies to reduce USDA loan closing costs.

How much are USDA closing costs?

Now that you’re familiar with the USDA loan down payment requirements—especially the advantage of not needing one—it’s important to also understand what you’ll need to bring to the closing table in terms of USDA closing costs.

While you won’t have to worry about a down payment for a USDA loan, you should be prepared for USDA closing costs, which typically range from 2-5% of the loan amount. This means that on a $300,000 USDA home loan, you might pay around $6,000 to $10,000 in closing costs. Of course, these can vary a lot by lender and location.

But the overall amount you’ll pay at closing is a lot less with USDA, because you don’t have to bring a down payment to the table.

USDA mortgages require no USDA loan down payment, making them an attractive option for many buyers. Compare that to an FHA loan for which you need 3.5% down, and a conventional loan that requires 3-5% down.

For a $200,000 home loan, the following down payments would apply.

Even though 0% down is required, you will still need to come up with closing costs, which could total thousands of dollars.

USDA closing costs come in two categories:

• Costs to acquire the loan and transfer title
• Expenses associated with the property

Typically, costs to acquire a USDA home loan and the property vary by lender and company, which expenses tied to the property don’t change no matter where you get a loan.

A closer look at USDA loan closing costs

When purchasing a home with a USDA loan, it’s important to understand the closing costs involved. While some of these fees are standard across all mortgage types, others are unique to the USDA rural development loan program.

Below, we’ll break down the standard closing costs you can expect, along with USDA loan closing costs.

Standard closing costs

Whether you’re refinancing your current USDA loan or securing a purchase loan, some expenses are required whenever you submit a loan application.

Below are common fees that you can expect to see included in your closing costs.

Loan origination fees

Typically, 0-1% of the loan amount. Your lender will charge an origination fee to process and underwrite your loan application.

“Some lenders have a flat fee, while others have percentages,” says Jon Meyer, The Mortgage Reports loan expert. “You can ask your lender if there is any wiggle room.”

Underwriting fees

Sometimes called loan application fees or processing fees, your Loan Estimate will reveal various in-house fees that are specific to your mortgage lender.

The good news is that sometimes underwriting fees, and many other closing costs, can often be negotiated. So speak with your loan officer about rebates and discounts.

Appraisal fee

A home appraisal is generally part of the loan application process — though there are exceptions.

A professional appraiser will establish the value of the property, based on an inspection of the home, local real estate market conditions, and comparable sale prices in your new home’s area.

Essentially, the appraisal fee covers the expense of verifying the property’s fair market value to ensure it matches the home’s purchase price.

Credit report fee

This fee covers the cost of pulling your credit reports from the major credit reporting bureaus to establish your credit score.

Discount points

Also known as mortgage points, discount points are an optional closing cost. When you buy, or pay, discount points at closing, you are basically paying money upfront to lower your loan’s interest rate.

Some borrowers use discount points as a strategy to reduce their monthly payments, which can save a substantial amount of money over the life of the loan.

Although, your specific savings will depend on how long you plan on living in the home before you sell or refinance.

Title fee

Title insurance protects your mortgage lender against claims or liens against your new home’s title.

As a home buyer, you may pay this fee as part of your closing costs, but sometimes the seller will absorb the cost of title insurance on behalf of the buyer.

Escrow fees

This fee is paid to the escrow or title company to set up an escrow account that will hold your earnest money and other funds that may pass between you and the seller.

Recording fees

The recording fee covers the expense to have your local government agency, often the County Recorder’s Office, update public recorders with new ownership details.

USDA-specific closing costs

There are two additional costs that are unique to USDA’s rural development loan: the guarantee fee and the annual fee.

USDA guarantee fee

USDA home loans feature what is called a guarantee fee, sometimes called a funding fee.

The guarantee fee is typically equal to 1% of your loan amount. This can be paid upfront, however most borrowers roll it into their loan balance to avoid the extra fee at closing.

USDA annual fee

While not a closing cost, USDA loans do carry an annual fee for mortgage insurance that is generally around 0.35% of the loan amount.

The annual mortgage insurance charge will be broken into 12 separate payments and included on your monthly mortgage bill. So this will not affect your USDA closing costs.

Costs specific to the property

Certain expenses are required any time you own a home. When you get a mortgage, the lender will require that you prepay a certain number of months of these expenses.

They do this to ensure that your new home is not in jeopardy of being seized by the government, in the case of unpaid taxes, or at risk of being destroyed with no insurance.

• Property taxes: typically around 1% of the property value per year
• Homeowner's insurance: $500-$1,000+ per year, depending on home value

The lender will typically require a few months’ worth of both property taxes and homeowners insurance to be paid upfront at closing. These are put into an “impound account” and paid out to the insurance company and tax authority by your lender when due.

Although the amount of upfront taxes and insurance varies by state, typical prepayment amounts might range from:

• 4-8 months of property taxes
• 12-14 months of homeowner’s insurance premiums

For instance, your home value is $200,000 and your property taxes are 1% per year. Plus, your homeowner’s insurance premium is $600 per year. The lender would collect approximately:

• $1,000 in prepaid taxes (6 months)
• $700 in prepaid insurance (14 months)

After collecting the fees, the lender sends payment to the county tax office and your insurance company. They handle these payments to ensure the items are paid in full.

Expenses like a home inspection and home warranty are a good idea, but not required or collected by the lender.

USDA home loan program eligibility

Having covered USDA loan down payment requirements and USDA closing costs, let’s not forget about eligibility. In order to qualify for a USDA loan, you will have to meet both the program’s household income limits and purchase a home in an eligible rural area.

Keep in mind that income limits will vary by both location and the number of persons in your household.

As an example, in 2024, the USDA’s household income limits varied widely between Chattooga County, Georgia and Aurora, Colorado.

Denver-Aurora-Lakewood area

• 1-4 person household: $147,550
• 5 or more person household: $194,800

Chattooga County

• 1-4 person household: $112,450
• 5 or more person household: $148,450

Further, many first-time homebuyers are surprised to see just how many homes are located in eligible rural areas. An estimated 97% of the U.S. land mass is considered rural by the USDA.

Other basic USDA eligibility guidelines

• Minimum credit score: No minimum is established, but often 640 with most approved lenders
• Credit history: Credit report should show no late payments or recent foreclosures or bankruptcies
• Income requirements: Income limits vary by region and number of persons in household. Typically, your income must be less than 115% of the area median income (AMI)
• Employment requirements: History of steady income and employment. Self-employed borrowers are eligible, too
• Property requirements: Must be a single-family home located in an eligible rural area that will be your primary residence
• Loan term: USDA only offers 30-year fixed-rate mortgages

Tips to pay for USDA closing costs

The good news is that you don’t have to pay USDA loan closing costs out of your own pocket.

Take out a bigger loan

A little-known USDA guideline says you can take a bigger loan amount to pay for USDA closing costs, if the appraised value is higher than the purchase price. For instance:

• $200,000 sale price
• $205,000 appraised value
• $5,000 extra loan amount available

Other ways to pay closing costs are as follows.

Seller credit

In some real estate markets, the seller can “kick in” extra money for closing costs.

Seller credits are typically available when a motivated seller is not getting many offers on the home.

“If you know that you will need more funds for USDA closing costs, you could make an offer for $10K over, with a $10K seller credit,” adds Meyer. “This is a very common strategy many of my clients use.”

Lender credit

The lender can raise your interest rate slightly and credit you the extra profit from that higher rate. For example:

• 4.0%: No lender credit
• 4.25%: $3,000 lender credit

That money can be used for all lender, title, escrow fees as well as property taxes and insurance

Gift funds

Gift funds allow you to receive financial assistance from a family member, employer, or other eligible sources to pay all or part of your USDA closing costs.

The bottom line of USDA loan down payment and closing costs

USDA loans offer great benefits, including no USDA loan down payment and manageable USDA closing costs.

This makes homeownership more affordable and accessible. So take advantage of these benefits—check your eligibility for this zero-down mortgage and start your path to owning a home today.