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.
Buying a home is an exciting milestone, but it can also be daunting especially when it comes to securing financing. Many buyers have questions about the details of different loan programs like whether USDA loans require private mortgage insurance (PMI). I want to provide an in-depth look at USDA loans, PMI, and other related costs to help you make an informed decision.
What is a USDA Loan?
USDA loans are a great mortgage option, especially for low- to moderate-income buyers in rural areas. These loans are backed by the US. Department of Agriculture, which is why they’re called USDA loans
The main perks of USDA loans are:
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No down payment required – This makes them more affordable than conventional loans that require 3-20% down.
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Low interest rates – USDA loans often have lower rates than other government-backed loans.
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Flexible credit requirements – You may qualify with a credit score as low as 640.
To be eligible, the home must be located in an area designated as “rural” by the USDA. You can check your address on their property eligibility map. Income and credit requirements also apply.
Do You Have to Pay PMI with a USDA Loan?
Short answer – no. USDA loans do not require private mortgage insurance (PMI).
PMI is a type of insurance required on conventional loans when borrowers put less than 20% down. It protects the lender in case the borrower defaults.
Since USDA loans are backed by the government rather than private lenders, they use alternate systems for managing risk instead of PMI.
What Fees Do Apply to USDA Loans?
While they don’t have PMI, USDA loans do come with the following costs:
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Upfront guarantee fee – This is a 1% fee that can be financed into your loan amount. On a $250,000 loan, this fee would be $2,500.
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Annual fee – The annual fee is 0.35% of the loan amount divided into monthly payments. On that $250,000 loan, this equals $73.65 per month.
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Closing costs – You pay the usual closing costs like appraisal, origination fees, etc. Some can be rolled into the loan.
The guarantee fees provide insurance protection to the USDA as the loan guarantor. So while they function similarly to PMI, they go to the USDA instead of a private mortgage insurer.
How Do Costs Compare to Other Loans?
To give the fees context, let’s look at how they compare to the mortgage insurance costs on FHA and conventional loans:
Loan Type – Upfront Fee – Annual Fee
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USDA – 1% of loan amount – 0.35% of loan balance
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FHA – 1.75% of loan amount – 0.45% to 1.05% of loan balance
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Conventional – None – 0.1% to 2% of loan balance
The USDA’s upfront and annual fees are very reasonable. FHA loans have higher upfront and ongoing mortgage insurance costs. With conventional loans, PMI varies greatly based on your down payment and other factors.
Over time, USDA’s annual fee is one of the most affordable options for low down payment mortgages.
Can I Remove the Annual Fee on a USDA Loan?
No, the annual fee continues for the full duration of the USDA loan. Unlike PMI on conventional loans, it can’t be removed when you reach 20% equity.
There are no options to cancel the annual fee unless you refinance into a different loan type. This long-term cost should be factored into your decision.
That said, the annual fee may still be low enough that a USDA loan makes sense for your situation. Run the numbers to see if it fits your budget.
Tips for Getting a USDA Loan
If you’re considering a USDA loan, keep these tips in mind:
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Check your eligibility and property options with the USDA map tool.
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Compare interest rates and costs to other loan programs.
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Ask lenders if they offer down payment assistance programs in your area.
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See if you can get help with closing costs through seller credits or lender credits.
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Get pre-approved so you’re ready to make competitive offers.
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Understand the home needs to be your primary residence. Investment properties don’t qualify.
Explore All Your Home Financing Options
While they aren’t perfect, USDA loans provide an excellent opportunity for low-income buyers to purchase a home with no down payment required. Just be sure to factor the annual fee into your home affordability calculations.
What are USDA Loans?
A USDA loan is a home loan guaranteed by the United States Department of Agriculture. Being backed by the government allows USDA loans to have lower interest rates and lower down payment requirements than conventional loans.
Other government-backed loans include VA loans and FHA loans, which are backed by Veterans Affairs and the Federal Housing Administration, respectively.
USDA loans are available to fewer people than other government-backed loans due to relatively stringent restrictions. Borrowers and the homes they are purchasing must qualify for the loan separately.
Additionally, since USDA loans are intended to assist those in more rural areas, they are not eligible in most urban and suburban areas. You can view location eligibility on the USDA website.
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.
Does a USDA Loan have PMI?
FAQ
Does PMI go away on a USDA loan?
How is USDA PMI calculated?
Do you pay PMI on an FHA loan?
Do USDA loans get denied in underwriting?
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 require private mortgage insurance?
One of the key benefits of USDA loans is that they don’t require private mortgage insurance (PMI). However, they do often have criteria for other forms of insurance coverage. Two of the most relevant examples are homeowner’s insurance and flood insurance, both of which have their own sets of requirements to be aware of when pursuing a USDA loan.
What is the USDA mortgage insurance?
The USDA mortgage insurance is 0.35% of the loan amount. The USDA payment calculator allows you to change the funding fees and insurance to reflect your mortgage. This is a USDA home loan calculator. Please use our advanced mortgage calculator for conventional loan mortgage payment calculations.