When you close on a USDA loan, you won’t make a payment for at least one month. It sounds too good to be true, right? It’s really not the ‘free ride’ it seems like. Keep reading to find out how it works.
Closing Your USDA Loan
You and your lender will choose a closing day for your USDA loan. You obviously can’t close on it until the underwriter clears it for closing. At this point, your lender will draw up the closing documents and you’ll meet your loan officer at the chosen title company. At the title company, an escrow agent will close your loan for you.
As you review your documents, you’ll see a Closing Disclosure. This document shows you all of the charges the lender and other third parties are charging for their role in your loan. Among those costs, you’ll see ‘prepaid costs,’ especially prepaid interest. This is the interest charged on your loan from the date of closing to the end of the month.
The closer you close to the end of the month, the less prepaid interest you pay. You can call the interest per diem interest, as it’s a per day charge. So if you close 10 days before the end of the month, you’ll pay 10 days of interest. If you close 2 days before the end of the month, you’ll pay 2 days of interest. As you can see, it works in your benefit to close as close to the end of the month as possible.
Why You Don’t Owe a Payment Right Away
You might still be thinking ‘what about the interest for the next month?’ If you don’t make a mortgage payment until the following month, when do you pay the interest for the entire month that you have the loan?
It’s simple – all of the interest that you pay, you pay in arrears. In other words, the interest you pay in October covers the interest from September. The interest you pay in November covers the interest for October.
This is why you ‘skip’ a payment. In reality, you are still paying interest from the day you take out the loan. You just don’t have to make a formal payment until the first of the month after the month of your closing.
For example, if you close on your loan on October 15th, your first USDA mortgage payment is due on December 1st. You would pay per diem interest to cover the rest of October. The mortgage payment you make then covers the interest from November.
The Exception to the Rule
In some cases (rare), you may be able to request that your mortgage payment start the very next month. This is the case when you close on your loan on the 1st, 2nd, or 3rd of the month. Lenders don’t usually allow this practice much after the 3rd day of the month.
If you do close on one of the above dates, you can ask the lender to credit you the few days of interest and have your first mortgage payment due in the very next month. Only lenders that can process the loan and get your account set up quickly can offer this option, though. It’s usually best if you stick to the late in the month closing in order to make things the easiest. This also gives you more time to prepare yourself for your new mortgage payment.
Either way, you are going to pay the same amount of interest on your USDA loan regardless of the closing date. It all comes down to how much money you have to come up with at the closing as well as how soon your first payment is due. Make sure you cover all of your options with your lender so that you make the choice that works the best for you.