The United States Department of Agriculture’s home loan program is designed to help those wanting to live in a rural area. At first glance, one might think there really are very few areas where rural financing is needed. In fact, USDA loans can be used in about 97 percent of the country. USDA loans must be used in pre-approved eligible areas. These areas are deemed rural by the United States Census Bureau after it issues the national census every 10 years. This is why some areas where USDA loans can be used appear to be in a suburban area, not rural, due to suburban “creep” over time.
Conventional loans, those underwritten to guidelines issued by Fannie Mae or Freddie Mac, can be difficult to approve in a rural area. This is because there are so few properties nearby the subject property that has recently sold. Such properties are called “comparable sales” or simply “comps.” Conventional appraisals need to identify at least three recent sales within the past year ideally within one mile of the property being purchased. USDA loans relax that guideline.
The main feature of the USDA loan is there is no need for a down payment. The only other government-backed loan with a 100% feature is the VA loan, reserved for veterans and those in the armed forces. But there are other benefits with a USDA loan as well. One of them relates to closing costs. There isn’t a down payment with a USDA loan, but all mortgages come with closing costs. It’s just a matter of who pays for them. With a USDA loan, sellers can help out with that.
How much are USDA closing costs? That will vary based upon the location of the property. Customs can vary from state to state and even city to city. If it is customary for sellers to pay certain buyer fees, buyers can expect them to be paid for. There is no legal guideline that requires sellers to pay for any buyer’s cost. However, getting the sellers to pay for a buyer’s closing costs, some or all of them can be part of the negotiation process.
Let’s say there is a home listed for $200,000. The buyers contact their loan officer and request a loan cost estimate, often referred to as a “good faith” estimate. This estimate will list the potential costs the buyers may see at the settlement table. A good estimate for closing costs is somewhere around 3.0 percent of the sales price of the home, but the loan officer will provide a more precise estimate. The loan officer provides the estimate and the costs amount to $4,000. The next question is who is going to pay for them. The buyer’s agent presents an offer of $200,000 and asks the sellers to pay $4,000 in closing costs. The sellers can agree, disagree or even counter the offer by agreeing to pay $2,000 in closing costs. But there are limits on how much the sellers can pay when the buyers are financing the property with a USDA loan.
Currently, the maximum amount sellers can pay on a USDA mortgage is up to 6 percent of the loan amount. That’s actually a lot of money. With a $200,000 loan, 6 percent equates to $12,000 and closing costs will be nowhere near that amount. That’s extremely generous. But even after the sellers agree to pay up to 6 percent, it’s the appraisal that needs to show such seller “concessions” are usual and customary for the area. There is a small section on the appraisal which will address the prominence of seller concessions.
It’s also possible that seller concessions can actually affect the final appraised value of the home. When an appraiser researches a home to see if such concessions are relatively common, and the seller concessions are unusually high, the appraiser can lower the appraised value of the home. The thinking is that, yes, the sales contract said $200,000 but the seller had to throw in $12,000 in seller concessions. That concession will lower the value. The final USDA loan value is based upon the lower of the sales price or the final appraised value.
It’s the real estate agent who can inform buyers if seller paid closing costs are common or not for the area. Further, if seller concessions are common, the agent will also know how much other sellers have been paying and adjust the offer accordingly.
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