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.
USDA loans offer zero down payment options and competitive interest rates to eligible homebuyers in rural areas. But do these mortgages also come with costly mortgage insurance?
The short answer is yes – USDA loans do require a type of mortgage insurance called a guarantee fee. However, the costs are relatively low compared to other popular loan programs.
Below we’ll explore exactly how USDA mortgage insurance works how much it costs, and how it compares to private mortgage insurance (PMI) and FHA mortgage insurance premiums (MIP).
What is Mortgage Insurance?
First let’s quickly recap what mortgage insurance is and why it exists
Mortgage insurance protects the lender in case the borrower defaults. Loans with less than 20% down are considered riskier so lenders require insurance.
On conventional loans, this insurance is called PMI and is provided by private companies. Government-backed loans have their own versions:
- FHA Loans – Mortgage insurance premiums (MIP)
- VA Loans – Funding fee
- USDA Loans – Guarantee fee
The borrower pays this insurance cost to offset the lender’s risk for high loan-to-value mortgages.
USDA Guarantee Fees
USDA loans are insured by the U.S. Department of Agriculture. This government backing allows for 100% financing.
Borrowers pay two USDA guarantee fees:
Upfront Guarantee Fee
- 1% of the loan amount
- Typically rolled into loan amount
Annual Guarantee Fee
- 0.35% of remaining balance
- Divided into monthly installments
- Included in mortgage payment
So for a $200,000 loan, you would pay a $2,000 upfront fee and roughly $58 per month for the annual fee.
How USDA Mortgage Insurance Compares to Other Loans
Here’s how the USDA guarantee fee stacks up against mortgage insurance costs on other common loans:
Loan Type – Upfront Fee – Annual Fee
-
USDA Loan – 1% of loan amount – 0.35% of remaining balance
-
FHA Loan – 1.75% of loan amount – 0.45% to 1.05% of remaining balance
-
Conventional Loan – None – 0.5% to 1% of loan amount
-
VA Loan – 1.4% to 3.6% of loan amount – None
USDA guarantee fees are very low, especially compared to FHA and VA loans. Conventional PMI can also be higher depending on your down payment and loan details.
Can I Cancel USDA Mortgage Insurance?
With PMI on conventional loans, you can request cancellation once you reach 20% equity through home value appreciation or mortgage paydown.
However, USDA annual guarantee fees cannot be cancelled based on home equity. You will pay the 0.35% annual fee for the full duration of your loan.
The only way to remove the USDA guarantee fee is by refinancing into a conventional loan once you have 20% equity.
Tips to Reduce USDA Mortgage Insurance Costs
While you can’t cancel USDA mortgage insurance, here are some ways to minimize guarantee fees:
-
Shop lenders – Compare quotes to find the best rates and fees. Costs can vary.
-
Buy below your limit – The fees are based on the loan amount, so buy a less expensive home to reduce them.
-
Make a down payment – Putting even 3% down can lower the loan amount and your fees.
-
Pay upfront – Paying the 1% guarantee fee upfront instead of adding it to your loan prevents it from accruing interest.
-
Shorten your term – Opt for a 15-year mortgage to pay off the loan faster, reducing total interest paid.
-
Refi when possible – Refinancing into a conventional loan lets you eventually eliminate the annual fee.
The Bottom Line
USDA loans do require mortgage insurance (called a guarantee fee), but costs are relatively low at 1% upfront and 0.35% annually. This premium provides consumer-friendly loan options for eligible buyers. Understanding the costs allows you to budget accordingly and shop lenders to minimize the fees.
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
USDA Mortgage Insurance Fees
USDA mortgage insurance is paid via two fees: an upfront guarantee fee equal to 1 percent of the loan amount, and an annual fee equal to 0.35 percent of the loan amount.
The one-time upfront guarantee fee, which is also referred to as the USDA funding fee, is paid at closing and typically financed into the loan.
The annual fee is lumped into your monthly payment and is paid for the life of the loan.
Pros and Cons of a USDA Loan | All You Need to Know About USDA Home Loans EXPLAINED
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 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:
Where can I get a USDA mortgage?
Although the USDA backs this program, it typically isn’t the one lending money. Instead, private lenders are authorized to offer USDA loans. That means you can get a USDA mortgage from many mainstream banks, mortgage lenders, and credit unions. The application process for a USDA mortgage works just like any other home loan.