Homebuyers who cant put down a sizable down payment with a conventional loan will often need to pay for PMI, or private mortgage insurance. This insurance is designed to protect the lender in the event you default on your loan.
For conventional loans, you’ll typically need to pay for PMI unless you can put down 20 percent of the purchase price. You can cancel PMI for conventional loans once you’ve paid off at least 20 percent of the loan value.
“USDA loans don’t have PMI. But these specialized loans require two different forms of mortgage insurance: an upfront guarantee fee and an annual fee that serves as the monthly mortgage insurance premium.” Said Sam Sexauer of Neighbors Bank. “Despite having two fees, the total costs of USDA mortgage insurance are often significantly lower than other loan options.”
In fact, mortgage insurance costs on FHA and conventional loans can be double or even triple those of USDA mortgages, posing a serious barrier for low-income and cash-strapped buyers.
Getting a mortgage to buy a home is an exciting yet often stressful process. As a first-time homebuyer, you want to make sure you understand all the costs involved so you can budget properly. One question that often comes up is whether USDA loans require mortgage insurance.
I’ll explain what mortgage insurance is, why some loans require it, and outline the specifics on insurance for USDA loans My goal is to provide a helpful guide so you can determine if a USDA loan is the right fit for your home buying needs
What is Mortgage Insurance and Why Do Some Loans Require It?
When you take out a mortgage loan to buy a home, the lender wants to ensure you can pay it back. If you default on the loan, they could be at risk of losing money. This risk increases when borrowers make smaller down payments.
With a conventional loan, if you put down less than 20% of the purchase price, most lenders require you to pay for private mortgage insurance (PMI). PMI protects the lender if you fail to repay the mortgage.
The premiums for PMI are usually between 05-1% of the total loan amount per year You pay this amount monthly along with your regular mortgage payment until you build up 20% equity in the home,
USDA Loans Have a Guarantee Fee Instead of PMI
Rather than private mortgage insurance, USDA loans have what’s called an annual guarantee fee. This provides a similar function to PMI in reducing the lender’s risk.
The guarantee fee on a USDA loans has two parts:
-
Upfront fee: 1% of the loan amount. Can be paid at closing or rolled into loan amount.
-
Annual fee: 0.35% of the loan balance paid monthly as part of mortgage payment.
So for a $200,000 USDA loan, the upfront fee would be $2,000. The annual fee works out to $58.33 per month ($700/year).
The combined guarantee fees on a USDA loan usually end up costing borrowers less than PMI on a conventional loan.
Key Advantages of USDA Loans
USDA loans offer significant benefits that make them an attractive option for eligible borrowers:
- 100% financing: No down payment required
- Competitive rates: Usually 0.5-0.75% lower than conventional loans
- Reduced mortgage insurance: Guarantee fee costs less than PMI
- Flexible credit guidelines: Minimum 640 credit score but can be lower
- Low income eligibility: 115% of area median income
These features allow USDA loans to help lower income families achieve homeownership. The program is an excellent opportunity if you qualify.
USDA Loan Requirements
While USDA loans provide affordable financing, you must meet certain eligibility criteria:
- Purchase a home in a designated rural area
- Meet income limits based on family size and location
- Have a stable income and credit history
- Occupy the home as your primary residence
- Be a U.S. citizen or qualified non-citizen
The home must also meet minimum property standards and be inspected by the USDA. Use the USDA Property Eligibility Site to check if a specific home qualifies.
How Much House Can I Afford with a USDA Loan?
When budgeting for a home purchase, your total monthly debt payments (including the future mortgage payment) should not exceed 41% of gross monthly income.
This debt-to-income ratio gives a guideline for how much house you can afford. Getting pre-approved for a USDA loan will tell you the maximum home price you qualify for based on your income, debts, and credit profile.
Use an affordability calculator to estimate the monthly payments for different mortgage amounts. This helps narrow your home search to a comfortable price range.
Steps to Getting a USDA Home Loan
If you want to move forward with a USDA loan, here is an overview of the process:
- Check eligibility requirements and property map
- Compare interest rates from multiple lenders
- Choose a lender and submit loan application
- Provide documents to verify income, assets, and credit
- Get pre-approved for a loan amount
- Make an offer and enter contract on a home
- Complete appraisal and USDA inspection
- Final underwriting and loan approval
- Close on mortgage and take ownership
The USDA has local offices that can assist you through the unique requirements to obtain one of these rural housing loans.
The Bottom Line
- USDA loans require an upfront and annual guarantee fee instead of private mortgage insurance
- The combined fees are lower in cost compared to PMI on conventional loans
- USDA loans offer 100% financing and competitive rates for eligible borrowers
- You must meet specific income limits and purchase a home in a rural area
Calculating the USDA Annual Fee
In addition to the USDA origination fee, you will also have an annual fee of 0.35 percent of the loan’s balance. The annual fee is calculated annually, but paid monthly as part of your monthly mortgage payment.
USDA loan annual fees are recalculated at the anniversary of the loans closing date every year, then spread evenly out in 12 equal payments.
Heres an example of how to calculate your USDA annual fee:
| Base Loan Amount |
|---|
| Funding Fee |
| Total Loan Amount = Base Loan Amount + Funding Fee |
| Annual Fee = Total Loan Amount x 0.35 percent |
| Monthly Payment = Annual Fee / 12 |
Annual fees for USDA and FHA loans are paid for the life of the mortgage, while VA loans only require the upfront funding fee.
Check Official USDA Loan Requirements
Calculating the Upfront Guarantee Fee
USDA mortgages have the lowest funding fee of all government-issued loan products. The guarantee fee for USDA loans is 1 percent of the total financed amount – meaning the total balance of the loan, not the sales price of the property.
Take a look at how the USDA funding fee compares to a $250,000 mortgage:
| Loan Type | Funding Fee Rate | Estimated Upfront Costs |
|---|---|---|
| USDA | 1% Upfront Funding Fee | $2,500 |
| FHA | 1.75% Upfront Funding Fee | $4,375 |
| VA | 2.15% Upfront Funding Fee | $5,375 |
In the scenario above, if you decided to pay a $10,000 down payment on your USDA loan that would lower your loan amount to $240,000 and your guarantee fee to $2,400 (240,000 x .01 percent). The funding fee for VA loans varies based on several factors, such as nature of service, down payment and first-time use. The calculation above uses the most common funding fee rate for first-time use. Conventional loans do not have an upfront fee.
Do USDA Loans Have Mortgage Insurance? – CountyOffice.org
FAQ
Can you avoid PMI with USDA loan?
Does mortgage insurance go away on a USDA loan?
Does USDA have upfront mortgage insurance?
Does USDA offer mortgage protection insurance?
Do USDA loans have mortgage insurance?
USDA Rural Development (RD) Single-Family Housing Direct loans have no private mortgage insurance. USDA Guaranteed Loans are charged an annual guarantee fee instead of mortgage insurance. Guarantee fees are paid to USDA by the approved lender and are usually included in the homeowner’s monthly loan payment.
What is a USDA mortgage?
USDA mortgages are aimed at borrowers buying in eligible rural areas. These loans come with lenient rules around credit scores and down payment requirements. USDA loans come with income limits that vary by location. USDA loans are one of many options available to finance a home purchase.
How much does USDA mortgage insurance cost?
Typically, USDA upfront mortgage insurance is rolled into your loan balance. Inspection fees: $300 to $500 for a property inspection to ensure USDA eligibility requirements are met. Closing costs: 2% to 5% of the home’s purchase price, including loan origination fees, appraisal fees, and title search fees.
How much does a USDA mortgage guarantee cost?
The USDA acts as a middleman between the buyer and lender when it comes to mortgage insurance. The guarantee fee is typically 1% of the total financed amount, meaning the total balance of the loan. Here’s a comparison of different loan types and their guarantee fees for a $200,000 mortgage: