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.
Buying a home is an exciting milestone, but it can also be daunting especially when navigating the various mortgage options. As a first-time homebuyer I was initially overwhelmed. But after doing my research, I learned that USDA home loans are an excellent option for eligible borrowers like myself. However, I was confused about private mortgage insurance (PMI). Do USDA loans require PMI like other conventional loans? Let’s break it down.
What is PMI?
First, what exactly is PMI? PMI stands for private mortgage insurance, which is a type of insurance lenders require when borrowers make a down payment of less than 20% on a conventional loan.
PMI protects the lender if the borrower defaults. By requiring PMI, the lender offsets the risk associated with low down payment loans. Borrowers pay an annual PMI premium based on a percentage of the total loan amount.
On conventional loans, PMI is typically between 0.1% – 2% of the total loan amount per year. PMI can be canceled once you build 20% equity either through your down payment or by paying down the loan balance.
USDA Loans Don’t Require PMI
So do USDA loans require PMI? The short answer is no USDA loans are government-backed mortgages aimed at low-to-moderate income borrowers buying homes in rural areas.
Instead of PMI, USDA loans use an upfront and annual guarantee fee to provide insurance for the lender. This guarantee fee works similarly to PMI in offsetting the risk of lending to buyers with less than 20% down.
The key differences between PMI and the USDA guarantee fee:
- PMI is for conventional loans only, while the guarantee fee is specific to USDA loans
- PMI is an annual premium paid monthly, while the guarantee fee has both an upfront and annual component
- PMI can be canceled once 20% equity is reached, but the guarantee fee remains for the life of the USDA loan
Understanding these differences is important when evaluating USDA loans vs other mortgage options.
USDA Guarantee Fee Breakdown
While USDA loans don’t have PMI, you will pay a guarantee fee to the USDA to back your mortgage. Here’s a breakdown:
Upfront Guarantee Fee
This 1% fee is based on the total loan amount and is usually rolled into your loan at closing. On a $200,000 loan, a 1% upfront fee is $2,000.
Annual Guarantee Fee
The annual fee is 0.35% of your loan balance paid monthly. On a $200,000 loan, that’s $700 annually or $58.33 per month. This fee lasts for the life of your USDA loan.
Compared to PMI, the USDA’s upfront and annual fees are very reasonable for the benefits offered through this program.
USDA Loan Costs vs Other Loans
To evaluate the affordability of the USDA guarantee fee, let’s compare total mortgage insurance costs against other common loans:
| Loan Type | Upfront Fee | Annual Fee |
|---|---|---|
| USDA | 1% | 0.35% |
| FHA | 1.75% | 0.45% – 1.05% |
| Conventional | None | 0.1% – 2% |
| VA | 1.4% – 3.6% | None |
Based on these ranges, USDA loans generally have lower annual mortgage insurance costs than FHA or conventional loans. The upfront fee is higher than a VA loan but without any annual fee.
Overall, the guarantee fee makes USDA loans extremely affordable compared to other options. The 0% down payment requirement also makes this program accessible for eligible borrowers.
Alternatives to Avoid PMI
While the USDA guarantee fee is reasonable, some borrowers may want to avoid monthly mortgage insurance costs. Here are a few alternatives:
-
Save up for a 20% down payment – This avoids PMI on a conventional loan, but isn’t feasible for many buyers.
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Take out a piggyback HELOC – Borrowers can take out a small home equity line of credit with their mortgage to reach 20% equity and avoid PMI.
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Look into lender-paid PMI – Some lenders will pay the PMI premium in exchange for a slightly higher interest rate.
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Explore other low down payment programs – VA and USDA loans avoid PMI, while FHA loans have low annual MIP.
Carefully comparing all options can help choose the most affordable mortgage for your situation.
The USDA Guarantee Fee is Worth It
As a first-time buyer, I found the USDA loan’s upfront and annual fees very reasonable given the incredible benefits:
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0% Down Payment – This removed the toughest hurdle for me as a first-time buyer
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Competitive Interest Rates – My rate was much lower than conventional loans
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Flexible Credit Guidelines – I qualified despite having average credit
While I don’t love paying the annual fee, it allows me to afford the home I want without draining my savings on a down payment. For buyers who qualify, the guarantee fee provides excellent value.
In conclusion, USDA loans do not require PMI, but instead charge an upfront and annual guarantee fee. This fee provides affordable mortgage insurance compared to other options. For eligible borrowers seeking a no down payment mortgage, the guarantee fee is absolutely worth it!
USDA vs conventional vs FHA vs VA mortgage insurance
Hereâs the bottom line: if you qualify for a USDA loan, you may save considerably on overall mortgage insurance costs, including upfront and ongoing fees. Ultimately, you may be able to buy a home with no down payment and lower monthly costs.
Hereâs a breakdown of the comparative insurance costs for USDA loans versus FHA, VA, and conventional loans for a $200,000 mortgage.
| Loan Type | Upfront Fees | Dollar Amount |
|---|---|---|
| USDA | 1% of loan amount | $2,000 |
| FHA | 1.75% of loan amount | $3,500 |
| VA | 1.4%-3.6% of loan amount as funding fee | $2,800-$7,200 |
| Conventional | none | $0 |
| Loan Type | Annual Fees | Monthly Amount |
|---|---|---|
| USDA | 0.35% | $58 |
| FHA | 0.85% | $142 |
| VA | 0% | $0 |
| Conventional | 0.5%-1.5% | $83-$250 |
Mortgage insurance: USDA vs. other government loans
USDA MI is not only lower than the PMI required on conventional loans, itâs lower than the mortgage insurance premiums (MIP) required by one of the most popular government-backed programs, FHA home loans.
The FHA requires both an upfront fee and an annual fee that usually lasts the life of the loan. You can roll both into the monthly mortgage payment, just as you can with USDA loans.
The current FHA upfront fee is 1.75% of the loan amount, substantially higher than the USDAâs 1.00% upfront fee. Thatâs $1,750 upfront for every $100,000 borrowed for FHA and $1,000 for every $100,000 in USDA financing.
The FHA annual MIP fee ranges between 0.45% and 1.05% of the loan amount per year, depending on your down payment, credit score, and the loan repayment term. The most common rate is 0.85% versus USDAâs 0.35% annual premium.
On a $250,000 loan, FHA mortgage insurance would cost around $178 per month compared to USDAâs $73.
At first glance, USDA seems like the clear winner over FHA because of the lower MIP rate and the more favorable down payment options â FHA loans require a 3.5% down payment, whereas USDA loans offer 100% financing.
However, USDA borrowers must purchase homes in qualifying locations and meet strict income limits. FHA loans may be used anywhere in the country and there are no income limits, making them accessible to a wider range of borrowers.
5 Things You Need to Know About USDA loans
Do USDA Loans require PMI?
Private mortgage insurance (PMI) is the term used for mortgage insurance on conventional (non-government-backed) loans. So no, USDA loans don’t require PMI; only conventional loans have PMI, and only on those loans where the borrower has less than 20% equity in their home. Other loan programs may have their own forms of mortgage insurance.
How much is USDA mortgage insurance compared to PMI?
For USDA mortgages, there is something similar to PMI called the USDA guarantee fee and USDA mortgage insurance. The one-time USDA guarantee fee is currently 1% of your base mortgage amount, and your final mortgage amount is equal to the base mortgage amount plus the guarantee fee. The USDA mortgage insurance is 0.35% of the loan amount.
Do USDA loans have monthly mortgage insurance?
With USDA loans, they don’t technically have monthly “PMI” mortgage insurance. Instead, USDA refers to this as their “annual fee” Like, FHA, the USDA annual fee is paid monthly for the life of the loan. The good news is this fee is less when compared to FHA loans. Here’s an example to help show you the difference:
What mortgage programs does the USDA offer?
The USDA offers three main mortgage programs: USDA Guaranteed Loan: Most USDA home loans are Guaranteed Loans. Borrowers can benefit from low interest rates and zero down payments. USDA Direct Loan: Direct Loans are issued by the government directly to the home buyer.
What is a USDA mortgage source?
This page updated and accurate as of 04/16/2024 USDA Mortgage Source USDA loans are much the same as other government-backed mortgages in that they require a one-time guarantee fee and annual (monthly) costs. The USDA loan guarantee & annual fee schedule for 2023 has remained unchanged from last year.
How do I get a USDA mortgage loan?
You can apply for a USDA home loan through an approved lender. The lender will require a home appraisal confirming that the property meets USDA requirements. Can I get an adjustable-rate USDA mortgage loan?