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.
USDA loans are popular options for homebuyers looking to purchase homes in rural areas. With lenient credit requirements, low interest rates, and no down payment, they make homeownership accessible to many borrowers who may not qualify for conventional loans.
But when it comes to mortgage insurance, USDA loans work differently than other loan types. So what about PMI on USDA loans? Do they require it?
In this comprehensive guide, we’ll explain how PMI and USDA loans intersect. We’ll cover:
- What is PMI?
- Do USDA loans have PMI?
- USDA mortgage insurance fees
- How USDA mortgage insurance costs compare
- Tips for minimizing USDA mortgage insurance
- USDA loan eligibility requirements
- How to apply for a USDA loan
Understanding the nuances of PMI and mortgage insurance for USDA loans can help you make the most informed home financing decision.
What is PMI?
PMI stands for private mortgage insurance. It’s a type of insurance lenders require on conventional loans when borrowers don’t make a 20% down payment.
PMI protects the lender if the borrower defaults. It charges a monthly premium rolled into the mortgage payment. On FHA loans, this type of insurance is called MIP, or mortgage insurance premium.
Borrowers can request to cancel PMI once they reach 20% equity through home value appreciation or by paying down the loan balance.
Do USDA Loans Have PMI?
USDA loans are government-backed mortgages, not conventional loans. So they do not require PMI.
However USDA loans do require mortgage insurance in the form of two fees
- Upfront guarantee fee
- Annual fee
So while USDA loans don’t have PMI they do require a type of mortgage insurance unique to this loan program.
USDA Mortgage Insurance Fees
USDA loans charge mortgage insurance through two fees:
Upfront guarantee fee: 1% of the total loan amount. This can be financed into the loan. On a $200,000 loan, it would equal $2,000.
Annual fee: 0.35% of the loan amount charged monthly. On a $200,000 loan balance, this equals about $58 per month.
The annual fee is calculated each year based on the current loan balance and divided into 12 monthly payments. It continues for the life of the loan.
How USDA Mortgage Insurance Compares
To understand how USDA mortgage insurance stacks up, let’s compare costs on a $200,000 loan:
| Loan Type | Monthly Mortgage Insurance |
|---|---|
| USDA | $58 |
| FHA | $150 |
| Conventional 97% LTV | $195 |
*Based on common rates for each loan type
As you can see, USDA mortgage insurance costs are significantly lower than FHA or conventional 97% LTV loans. This cost savings makes USDA loans attractive, offsetting some of the limitations like income and location requirements.
Over the life of the loan, USDA mortgage insurance costs borrowers thousands less than other government programs or low down payment conventional loans.
Tips for Minimizing USDA Mortgage Insurance
While you can’t remove mortgage insurance on a USDA loan, a few strategies can help minimize costs:
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Shop for the best rates – Compare offers from multiple lenders to find the lowest rates and fees. Even a small rate difference can save thousands over the loan term.
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Buy down the rate – Paying points upfront to lower the interest rate reduces the loan balance and long-term costs.
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Make a down payment – Even a 5-10% down payment on a USDA loan can significantly reduce mortgage insurance fees.
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Pay more each month – Making biweekly or additional principal payments cuts interest and reduces loan balance faster.
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Refinance later – When rates drop in the future, refinancing to a lower rate will lower mortgage insurance costs.
USDA Loan Eligibility Requirements
In addition to location requirements, borrowers must meet eligibility criteria for USDA loans:
- Income within 115% of area median income
- Credit score of 640+
- Debt-to-income ratio under 29%/41%
- Sufficient income documentation
- U.S. citizenship or permanent resident status
The property must also meet USDA requirements regarding location, access, utilities, and more. An eligible property is key to qualifying for a USDA mortgage.
How To Apply for a USDA Loan
Ready to move forward with USDA loan financing? Here are the steps to take:
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Research USDA income and property eligibility requirements in your area and for the home you want to buy. The USDA website has helpful tools.
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Check your credit score and report. Take steps to improve your score above 640 if needed. Pay down debts to lower your debt-to-income ratio.
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Get pre-approved with a lender that offers USDA loans. This shows sellers you’re a serious buyer.
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Make an offer on an eligible property in a USDA-approved location.
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During escrow, complete the full USDA loan application with income and asset documentation.
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Your lender will manage the underwriting and approval process.
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Once approved, you’ll close on your USDA loan and start making mortgage payments, including the annual mortgage insurance fee.
While USDA loans don’t require PMI, their mortgage insurance fees are far lower than comparable loan programs. If you’re buying a home in an eligible rural location, a USDA loan can make homeownership affordable.
What are the Benefits of a USDA Loan?
The USDA loan enjoys multiple benefits over other loan types thanks to its stringent requirements and government backing, which allow lenders to offer highly competitive loans and terms that can’t be matched with other loans. Some of the main benefits include:
- Little or no down payment—Guaranteed USDA loans do not require a down payment. While this results in higher monthly payments, it lowers the initial bar for homeownership.
- Low credit score requirements—Applicants with a credit score of 640 or higher qualify for automatic approval via the USDA’s automated underwriting system.
- Refinancing eligibility—Loans can be refinanced into a USDA loan, thereby potentially lowering your monthly payment.
- Low and fixed interest rates—USDA loans are available with low and fixed interest rates that vary by lender.
How to Qualify for a USDA Loan
Should your would-be home reside in a rural area that is eligible for a USDA loan, you’ll still have to meet other requirements in order to qualify for a USDA loan. There are requirements for both applicants and the property itself. Additional requirements may also be implemented by each lender that offers USDA loans.
Does a USDA Loan have PMI?
FAQ
Can PMI be removed from a USDA loan?
How is USDA PMI calculated?
Do you pay PMI on an FHA loan?