It’s no secret that purchasing a home is an expensive and time-consuming process. There are costs at nearly every step of the way—not to mention the fact that homes are simply not cheap. That’s why it is so important to get an affordable loan.
A USDA loan could be your ticket to an affordable loan and the home of your dreams—if you and the home you’re interested in qualify, that is. What is a USDA loan? How do you qualify for it? What are its benefits? And how do you apply? Here at Landmark National Bank, we’ve got all these answers for you and more.
Purchasing a home is an exciting milestone in life, but it can also be a daunting process, especially when it comes to securing financing. Many homebuyers are interested in low down payment mortgage programs like USDA loans to make buying a home more affordable. However, these types of loans often require private mortgage insurance (PMI). So does a USDA loan have PMI?
The short answer is no. USDA loans do not have PMI. Instead, they have an upfront guarantee fee and annual fee that serves a similar function to PMI.
In this article, we’ll break down exactly what PMI is, how it works on conventional loans, and why USDA loans don’t require it We’ll also go over the fees associated with a USDA loan and how they compare to PMI
What is Private Mortgage Insurance (PMI)?
Private mortgage insurance is an insurance policy that protects the lender in case the borrower defaults on a home loan It is required on conventional loans when the borrower makes a down payment of less than 20% of the home’s value.
PMI helps offset the risk associated with low down payment loans If the borrower stops making payments, the PMI policy pays the lender a portion of the outstanding loan balance. This ensures the lender doesn’t lose a ton of money if the borrower defaults early on in the loan term
The cost of PMI varies by lender but generally ranges from 0.5% – 1% of the total loan amount per year. It is paid as part of the monthly mortgage payment until the borrower builds up at least 20% equity in the home.
Why Don’t USDA Loans Have PMI?
USDA loans do not have PMI because the Department of Agriculture (USDA) backs these loans. Instead of the lender taking on all the risk themselves, the USDA guarantees a portion of the loan. This removes the need for private mortgage insurance.
However, USDA loans aren’t completely free of added fees and costs. While they don’t have PMI, they do have:
- Upfront Guarantee Fee: 1% of the loan amount, paid at closing
- Annual Fee: 0.35% of the loan amount, divided into 12 monthly payments
These fees essentially serve the same purpose as PMI – they provide money to the USDA to offset losses in case the borrower defaults. However, the fees tend to be lower than PMI on a conventional loan.
How Do USDA Fees Compare to PMI?
To see how USDA fees stack up against PMI, let’s look at some examples:
Loan Amount: $250,000
Down Payment: 0%
PMI Cost:
- Annual PMI Premium: 0.5% – 1% of loan amount
- Total Annual Cost = $1,250 – $2,500
USDA Fee Cost:
- Upfront Guarantee Fee: 1% of $250,000 = $2,500
- Annual Fee: 0.35% of $250,000 = $875
In this scenario, the total annual cost of PMI on a conventional loan would be higher than the combined upfront and annual fees for a USDA loan. This demonstrates how USDA loans can be more affordable, even with the guarantee and annual fees.
The exact cost of PMI depends on your credit score, loan-to-value ratio, and lender. But generally, USDA fees are very competitive with or cheaper than PMI on a conventional loan with less than 20% down.
Can I Cancel USDA Fees Like PMI?
With a conventional loan, you can request to have your PMI premium canceled once you build up 20% equity in the home.
Unfortunately, you cannot cancel the upfront guarantee fee or annual fee on a USDA loan based on your equity position. The fees are charged for the full duration of the loan.
The only way to eliminate the fees is to refinance into a conventional loan once you have 20% equity. But keep in mind refinancing costs money, so you’d have to run the numbers to see if it makes sense.
Key Takeaways
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USDA loans do not have PMI because the USDA backs a portion of the mortgage, reducing the lender’s risk.
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Instead of PMI, USDA loans have a 1% upfront guarantee fee and 0.35% annual fee to compensate the USDA.
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These fees are typically cheaper than PMI on a comparable conventional loan.
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The fees exist for the life of the USDA loan and cannot be canceled like PMI.
While it may seem annoying to pay any type of added fee, just remember that USDA loans offer significant benefits like zero down payment and low interest rates. For many borrowers, the guarantee and annual fees are a small price to pay for a low out-of-pocket and affordable home loan.
Do USDA Loans Have PMI?
No, USDA loans do not require private mortgage insurance, or PMI, as PMI only applies to conventional loans. However, USDA loans do have two types of fees that function similarly to PMI.
The first is called an upfront guarantee fee, which equals 1 percent of the total loan amount. The second fee is called the annual fee, which equals 0.35 percent of the loan amount. The upfront fee is paid at closing and is rolled into the loan amount, while the annual fee is calculated once per year and then divided into monthly payments along with other monthly costs.
These fees are levied no matter if you pay 0 percent down or 20 percent down. However, these fees are usually cheaper than PMI attached to a conventional loan.
USDA Loan Requirements for Borrowers
- Income—Applicants will not be considered if they exceed 115 percent of the home location’s median household income.
- Citizenship—Applicants must be a U.S. Citizen, non-citizen national, or Qualified Alien.
- Creditworthiness and Income—Applicants must be creditworthy and have the ability to pay the mortgage, and must supply evidence (IE employment history, payment history, etc.).
Does a USDA Loan have PMI?
FAQ
Does PMI ever go away on USDA loan?
Does USDA use PMI?
How is USDA PMI calculated?
Do USDA loans have higher interest rates?