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 are a popular mortgage option for rural homebuyers. With 100% financing and flexible credit requirements, they remove many barriers faced by first-time buyers and low-income borrowers. But like all mortgages, USDA loans come with costs and fees. One question on many buyers’ minds is: do you pay private mortgage insurance (PMI) with a USDA loan?
The short answer is no. USDA loans do not require PMI. But there are still mortgage insurance costs involved. Let’s take an in-depth look at USDA mortgage insurance and fees.
What is PMI?
First a quick overview of what PMI is and how it works. PMI stands for private mortgage insurance. It is an insurance policy that protects the lender if the borrower defaults on a conventional loan.
PMI is typically required on conventional loans when borrowers make a down payment of less than 20%. It helps offset the higher risk that comes with small down payments.
On conventional loans, PMI can be canceled once you build enough home equity to reach 20% of the property value. The cost of PMI varies, but often falls in the range of 0.5% – 1% of the total loan amount annually.
USDA Loans Don’t Have PMI
USDA loans are not conventional mortgages. They are government-backed loans issued by the U.S. Department of Agriculture. So PMI does not apply to these specialized home loans.
You may hear PMI referred to as a “mortgage insurance premium” or MIP on other government loans like FHA and VA mortgages But PMI itself only pertains to conventional loans with less than 20% down
So if you want to avoid PMI USDA loans present a great option. You can purchase your home with no down payment at all. Without any home equity built up PMI would be mandatory on a conventional loan. But with a USDA mortgage, 100% financing means zero PMI.
USDA Loan Guarantee Fee
Now just because USDA loans don’t have PMI, that doesn’t mean you’re off the hook for mortgage insurance costs completely. These government-backed loans do come with fees that act similarly to PMI in offsetting risks.
For USDA mortgages, this fee is called a “guarantee fee.” It has two parts – an upfront fee at closing and an annual fee. Let’s break these down.
Upfront Fee
The upfront USDA guarantee fee equals 1% of your total loan amount. On a $200,000 purchase price with no down payment, the upfront fee would be:
$200,000 x 1% = $2,000
This fee can be rolled into your loan amount rather than paid upfront in cash.
The 1% upfront guarantee fee for USDA mortgages is lower than other government loans. For comparison:
- FHA loans charge an upfront fee of 1.75%
- VA loans charge an upfront fee of 2.3% on average
Annual Fee
In addition to the upfront cost, you’ll pay an annual guarantee fee of 0.35% of the loan amount. This gets calculated each year based on your current mortgage balance, then divided into 12 monthly payments.
For example, if you took out a $200,000 USDA loan, your annual fee in year one would be:
$200,000 x 0.35% = $700
$700/12 = $58.33 monthly
The annual guarantee fee lasts for the entire duration of the USDA loan.
How USDA Fees Compare to PMI
To see how USDA guarantee fees stack up against PMI on a conventional loan, let’s look at an example.
Loan amount: $200,000
PMI: 0.85% annually
Upfront USDA fee: 1% of $200,000 = $2,000
Annual USDA fee: 0.35% of $200,000 = $700 annually or $58/month
Annual PMI: 0.85% of $200,000 = $1,700 annually or $141.67/month
In this scenario, the total annual cost of PMI is over twice as expensive as the combined USDA guarantee fees. This cost advantage makes USDA loans extremely competitive even with the guarantee fees involved.
USDA Loans Still Beat PMI
While you won’t pay PMI with a USDA home loan, you will have guarantee fees that work similarly to mortgage insurance. But the costs are lower than PMI on a conventional loan.
In most cases, USDA guarantee fees add up to significantly less than PMI would. And you get to skip PMI completely with the 100% financing perk.
For homebuyers in rural areas, the guarantee fees are a small price to pay for the many benefits of USDA mortgages. You get affordable low or no down payment options that open doors for buyers who may not otherwise qualify for homeownership.
Other USDA Loan Costs
Beyond guarantee fees, USDA mortgages have a few other costs to be aware of.
Interest rate – USDA loans may have slightly higher rates than conventional mortgages. But they still tend to beat FHA rates. Shop around for the best deals.
Closing costs – You’ll pay closing costs like with any mortgage. But many can be rolled into your USDA loan amount.
Upfront prepaids – Expenses like homeowners insurance, property taxes, and mortgage insurance for the first year are often paid at closing.
Ongoing mortgage insurance – The annual 0.35% guarantee fee functions as your mortgage insurance and lasts for the life of the loan.
USDA origination fee – Lenders can charge up to 1.5% of the loan amount as an origination fee.
Even with these costs, USDA loans provide exceptional value and make homeownership attainable for more buyers.
The Bottom Line
While you won’t pay private mortgage insurance premiums, USDA home loans do come with guarantee fees that function similarly. But the costs are significantly lower than PMI on conventional mortgages in most cases.
For eligible borrowers, the guarantee fees are a worthwhile tradeoff. You get to buy a home with little to no down payment while avoiding PMI. That’s an unmatched combo that removes major hurdles for affordable homeownership.
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.
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.
Does a USDA Loan have PMI?
FAQ
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