When a USDA Loan Amount Can Be Greater Than the Purchase PriceDate: May 19, 2011
One of the little known facts of the USDA Loan program is that, under certain circumstances, the closing costs can be included in the final loan amount. This option is available when the appraised value exceeds the purchase price, then this variance can be used to cover the closing related costs of the loan. No other loan program on the market allows for this optional increase.
For example assume a purchase price of $100,000, closing related costs and escrows of $5,000, and an appraised value of $104,000. Normally the new homeowner will have a base loan amount of $100,000, before factoring in the USDA Guarantee Fee, and will have to bring to settlement $5,000 to cover the cost of closing on the loan. With the USDA Loan, since the appraised value exceeds the purchase price by $4,000, the homeowner can include $4,000 of their $5,000 in closing costs and escrows into the new loan. The result will be a new base loan amount, before the inclusion of the USDA Guarantee Fee, of $104,000 and only requiring $1,000 at settlement.
Remember there is a 3.50% USDA Guarantee Fee that needs to be financed into the final loan amount. Also in order for the borrower to increase the loan amount they will need to have sufficient income to cover the increase in the mortgage payment for qualifying purposes.