USDA PMI is a misnomer, as private mortgage insurance is unique to conventional loans. But USDA loans require their own version of mortgage insurance. Find out how much you might pay.
Do you want to buy a home but worry about coming up with a down payment? A USDA loan can ride to the rescue, thanks to its 0% down payment option.
There are a lot of reasons to love USDA loans: 100% financing, competitive interest rates, flexible credit score requirements.
But a lesser-known reason to appreciate these government-backed mortgages is that mortgage insurance for a USDA loan is typically lower than FHA loans or the private mortgage insurance (PMI) youâd pay on a conventional loan.
Lower mortgage insurance isnât as sexy as no down payment or competitive interest rates, but it does affect how much your home will ultimately cost you.
Do USDA Loans Have PMI? Ins and Outs of Mortgage Insurance for Rural Homebuyers
Buying a home in a rural area? If so a USDA loan may be the ideal mortgage program for you. USDA loans help make homeownership possible for lower-income borrowers in small towns and rural communities across America. With no down payment required and lower interest rates than conventional loans, it’s easy to see the appeal.
But what about mortgage insurance? Do USDA loans require private mortgage insurance (PMI) like many other low down payment loan programs? Let’s take a closer look at the details on mortgage insurance and USDA home loans.
What is a USDA Loan?
First, a quick primer on what USDA loans are and how they work. USDA stands for the United States Department of Agriculture – the government organization that backs these mortgages. The USDA partners with private lenders to offer special financing to qualifying borrowers in rural locales.
USDA loans offer two main perks
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No Down Payment Required – You can get a USDA mortgage with zero money down, unlike a conventional loan that typically requires at least 3-5% down. This removes a major hurdle for first-time homebuyers without substantial cash savings.
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Below-Market Interest Rates – USDA loans often have lower interest rates, saving borrowers thousands over the life of the loan. Rates are generally 0.5 to 0.75% less than other common loans.
To qualify for a USDA home loan, borrowers must meet income limits set by the USDA as well as purchase a home in an eligible rural area. The USDA has an online map tool you can use to check if a property falls within a qualified rural zone.
What is Private Mortgage Insurance?
Private mortgage insurance, or PMI, is a type of insurance required on most conventional loans with less than 20% down. It protects the lender in case the borrower stops making payments.
PMI costs range from 0.1% to 2% of the loan amount per year. On a $200,000 mortgage, that could mean $200 to $4,000 annually. PMI stays in place until you build 20% home equity through your down payment and monthly payments.
Government-backed loans like FHA and VA mortgages have their own forms of mortgage insurance, called MIP and funding fees. These work similarly to insure the lender against default.
Do USDA Loans Require PMI?
Now let’s get to the key question – do USDA loans require PMI? The short answer is no. USDA loans do not require private mortgage insurance.
However, there are still guarantee fees unique to USDA mortgages. So you won’t pay PMI, but will pay small fees that provide insurance to the lender.
Upfront and Annual USDA Guarantee Fees
Instead of PMI, USDA mortgages come with two guarantee fees:
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Upfront Fee – 1% of the loan amount charged at closing. On a $250,000 loan, this equals $2,500. Borrowers can roll this cost into the mortgage instead of paying upfront.
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Annual Fee – 0.35% of the loan balance each year, or about $73 per month on a $250,000 loan. This gets divided into 12 monthly installments as part of your mortgage payment.
So while not technically PMI, these guarantee fees act similarly to insure the lender and offset the risk of lending with no down payment. But they end up costing borrowers a fraction of what PMI on a conventional loan would.
How Do Costs Compare to Other Loans?
Let’s look at typical mortgage insurance costs for popular loan programs:
- USDA Loan – 1% upfront fee + 0.35% annual fee
- FHA Loan – 1.75% upfront MIP + 0.15% to 0.75% annual MIP
- Conventional Loan – No upfront PMI + 0.1% to 2% annual PMI
- VA Loan – 1.25% to 3.3% funding fee, no annual fee
As you can see, USDA guarantee fees are very affordable compared to PMI or MIP on other mortgages. This helps maximize savings for rural borrowers.
Do USDA Refinances Have Guarantee Fees?
If you’re refinancing into a USDA loan, you’ll still pay the same guarantee fees:
- 1% upfront fee rolled into loan amount
- 0.35% annual fee as part of monthly payments
These fees apply to both USDA purchase mortgages and refinances.
How to Minimize USDA Guarantee Fees
While affordable, here are some tips to minimize guarantee fees:
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Shop Lenders – Compare quotes from multiple lenders. One may offer lower fees than another.
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Buy Discount Points – Pay points upfront to lower your interest rate, which reduces monthly fees.
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Make a Down Payment – Even a small 3-5% down payment can lower the upfront fee.
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Pay Upfront – If possible, pay the 1% fee in cash instead of adding to loan amount.
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Refinance Later – When home equity rises, refinance to a conventional loan to eliminate fees.
USDA Loans vs Conventional Loans
How do costs stack up for USDA borrowers compared to those who qualify for conventional financing? Let’s look at two scenarios.
USDA Borrower
- Home Price: $250,000
- Down Payment: $0
- Interest Rate: 4.5%
- Upfront Fee: $2,500 (1% of $250,000)
- Monthly Fee: $73 (0.35% of $250,000 loan balance)
Conventional Borrower
- Home Price: $250,000
- Down Payment: $12,500 (5%)
- Interest Rate: 5.25%
- Upfront PMI: $0
- Monthly PMI: $208 (0.83% of $237,500 loan balance)
The USDA borrower pays more upfront with the guarantee fee but less per month. And they get to keep their entire savings instead of putting 5% down.
Over 5 years, the USDA borrower pays $5,760 in fees vs $12,480 for the conventional borrower when you add up monthly and upfront costs. The USDA loan saves nearly $6,700.
So while you pay fees with a USDA loan, they end up being more affordable compared to PMI while requiring zero down payment. For low-income rural buyers, the savings are significant.
Alternatives to Avoid PMI
If you don’t qualify for a USDA loan, here are some options to avoid PMI on a conventional mortgage:
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Save a 20% Down Payment – Large enough to eliminate PMI needs
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Take Out a Second Lien – A piggyback HELOC or second mortgage instead of PMI
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Use State Housing Programs – First-time buyer programs may offer PMI-free options
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Ask Lender – Some will remove PMI with 18% equity vs 20%
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Buy it Out Early – Pay down loan faster to request PMI removal sooner
The Bottom Line
USDA home loans make buying a home more affordable for rural households. While you will pay small guarantee fees, they end up being cheaper than PMI on a conventional loan in most cases.
The guarantee fees replace the need for a down payment, allowing borrowers with limited savings to still achieve homeownership. For low-to-moderate income buyers in small towns and farming communities, USDA loans can be an ideal mortgage solution.
USDA mortgage PMI FAQs
USDA loans include a mortgage insurance requirement, also called the USDA annual fee. This is different from private mortgage insurance (PMI), which applies to conventional loans with less than 20% down. USDA mortgage insurance rates tend to be lower than those for PMI, which can make your monthly payments more affordable.
The USDA mortgage insurance premium requirement lasts for the life of your loan.
USDA loans have a mortgage insurance premium requirement as long as you have the loan. However, once you have 20% equity in your home, you may be able to refinance to a conventional loan without private mortgage insurance.
USDA loans offer many advantages to folks who meet the income requirements in eligible areas â including low MIP rates. Combined with the 0% down payment option, USDA mortgages can make homeownership affordable for more people in rural and suburban areas.
USDA Guaranteed Rural Housing loans subject to USDA-specific requirements and applicable state income and property limits. Fairway is not affiliated with any government agencies. These materials are not from USDA, RD, FHA, HUD, or the VA, and were not approved by any government agency.
*Pre-approval is based on a preliminary review of credit information provided to Fairway Independent Mortgage Corporation, which has not been reviewed by underwriting. If you have submitted verifying documentation, you have done so voluntarily. Final loan approval is subject to a full underwriting review of support documentation including, but not limited to, applicantsâ creditworthiness, assets, income information, and a satisfactory appraisal.
Some references sourced within this article have not been prepared by Fairway and are distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway. No items found.
What is USDA mortgage insurance?
Borrowers who take out 0% down USDA loans to buy a home pay mortgage insurance (also known as an âannual feeâ) of 0.35% of the existing loan amount. Each year that the loan is paid down, the mortgage insurance drops, too.
This mortgage insurance is equivalent to conventional mortgage PMI, as it serves the same purpose.
The USDA annual fee acts as a protection against potential losses for mortgage lenders and the U.S. Department of Agriculture (USDA), the federal agency that insures these loans. Itâs a little like a car insurance policy. Itâs there just in case of a collision, or in this case, if the borrower defaults on the loan.
Lenders who approve mortgages with less than 20% down typically charge mortgage insurance to cover themselves in case of default â and those working with the USDA are no exception.
USDA MIP comes in two forms: a one-time upfront guarantee fee of 1% of the loan and the annual 0.35% fee, paid in 1/12 installments each month along with the payment. You donât have to make a separate payment toward mortgage insurance; itâs included in the one payment to your lender each month.
As far as the 1% upfront amount, most buyers include that in the loan amount. You can do that even if the final loan amount is above the appraised value.
For instance, buying a $200,000 home would net a final loan amount of around $202,000 because the 1% fee is usually wrapped into the loan. Of course, you might be able to pay the upfront fee in cash, with gift funds, or by using seller contributions. But that depends on whether you have those funds available.
The USDA MIP rate is lower than conventional loan PMI rates and the MIP youâd pay on an FHA loan, which is also government-backed. However, youâll pay MIP for the duration of the loan, unless you refinance to a conventional loan once you reach 20% equity in the home.
Does a USDA Loan have PMI?
Do USDA loans charge mortgage insurance?
USDA mortgage insurance Unlike conventional loans, USDA loans don’t charge private mortgage insurance (PMI). But the Department of Agriculture does impose its own upfront and annual fees to keep the program running. “The [USDA] program requires you to pay a guarantee fee, which serves as a low-cost type of mortgage insurance.
Do USDA loans have PMI?
USDA loans do not have PMI. PMI is used for conventional loans because the lender is assuming a higher level of risk. With USDA loans, the Department of Agriculture is taking on a portion of the risk by backing these loans. Instead of requiring mortgage insurance, USDA loans have a guarantee fee and annual fee.
Is a USDA loan a good idea?
USDA loans often have lower interest rates and more flexible credit score requirements than conventional loans. Although this type of mortgage loan is affordable in many ways, know that you will have to pay what is known as a guarantee fee or funding fee, which basically acts as USDA mortgage insurance.
Can you refinance a USDA loan without mortgage insurance?
You must pay the insurance premium for the life of the loan. One way to get rid of this insurance is to refinance out of your USDA loan and into a conventional loan — if you have at least 20% equity in your home, you can refinance into a conventional loan without getting mortgage insurance.