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 navigating the mortgage process can be daunting for first-time buyers If you’re looking into USDA loans, you probably have questions about the required mortgage insurance I’ll explain everything you need to know in simple terms.
USDA loans are 100% financing mortgages insured by the US. Department of Agriculture Rural Development program. They help low-to-moderate income buyers in eligible rural and suburban areas get into a home with no down payment
But like most zero-down mortgage programs, USDA loans require mortgage insurance. I’ll walk through what it covers, costs, and how it compares to other loan types. I aim to provide clear details so you can make an informed decision.
What is Mortgage Insurance?
First, what is mortgage insurance and why is it required?
When you put less than 20% down on a home, the lender is taking on more risk. If you default, they may not recover the full loan amount from selling the property.
Mortgage insurance protects the lender by covering losses if you can’t repay the loan. It provides an added layer of security so lenders feel comfortable offering low and zero down payment mortgages.
On conventional loans, this insurance is called private mortgage insurance (PMI). Government-backed loans like FHA, VA, and USDA have their own forms of mortgage insurance.
Overview of USDA Loan Mortgage Insurance
For USDA loans, the mortgage insurance is called a guarantee fee. Here’s a quick rundown of how it works:
-
Upfront Fee: 1% of the loan amount. This covers the lender’s initial risk.
-
Annual Fee: 0.35% of the loan balance each year. Paid monthly and provides ongoing coverage.
For example, on a $200,000 loan you’d pay a $2,000 upfront fee and roughly $58 per month.
The upfront fee can be rolled into the mortgage. The annual fee is paid as part of your monthly mortgage payments.
Comparing Mortgage Insurance Costs
How do costs stack up across loan types? Here’s a comparison of typical mortgage insurance rates:
- USDA: 1% upfront, 0.35% annual
- FHA: 1.75% upfront, 0.45% – 0.85% annual
- Conventional: No upfront, 0.31% – 1.86% annual
- VA: 1.4% – 3.6% upfront only
Rates vary based on your specific loan, credit, and other factors. But in general USDA mortgage insurance costs are moderate.
FHA loans have higher upfront costs but lower annual fees. Conventional loans skip the upfront fee but annual rates can be higher than USDA. VA has no ongoing fee but a larger single upfront charge.
Paying the Fee When Refinancing
The guarantee fee applies on both USDA purchase loans and refinances. So if you refinance later on, you’ll pay another 1% upfront fee and continue the 0.35% annual payments.
This is something to keep in mind if you may refinance down the road. Ask your lender to break down total costs over the life of the loan.
Is USDA Mortgage Insurance Worth it?
Given the mortgage insurance costs, are USDA loans still a good deal? In my opinion, yes absolutely!
Here are some of the key benefits that make it worthwhile:
-
Zero Down Payment: This removes the biggest hurdle for most buyers. No need to save up thousands for a down payment.
-
Low Rates: USDA loans offer some of the lowest rates available, making them very affordable.
-
Low Credit OK: Credit scores as low as 640 may qualify. Ideal for first-time buyers who don’t have perfect credit yet.
-
Reduced PMI: Annual mortgage insurance rates are lower than conventional loans.
-
Rural Options: USDA loans open up affordable financing for eligible rural/suburban areas.
The guarantee fee is reasonable in my view. And for buyers who don’t have much cash or home equity, it enables low-cost financing that would otherwise be impossible.
Steps to Getting a USDA Loan
If you think a USDA loan may be a fit, here are some tips on getting started:
-
Check your eligibility. Make sure you meet income limits and the property is in an eligible area.
-
Compare mortgage rates from multiple USDA lenders. Rates and fees can vary.
-
Get pre-qualified. This shows sellers you’re serious. It also gives you an estimate of potential mortgage costs.
-
Ask lenders to explain all fees, including rolling closing costs into the loan amount. Make sure you understand the total costs.
-
Compile all required financial documents like tax returns, pay stubs, and bank statements.
-
Be prepared to move quickly if you find the right home! In competitive markets, USDA pre-approval can give you an edge.
The bottom line is USDA loans provide a great opportunity for eligible buyers to get into a home with little cash out of pocket. The mortgage insurance fees are reasonable considering the benefits. Shop around, understand all costs, and educate yourself on the process. You’ll be in a great position to capitalize on this amazing program.
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.
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.
USDA and Mortgage Insurance
FAQ
Does mortgage insurance go away on a USDA loan?
Does USDA have PMI or MIP?
How is USDA mortgage insurance calculated?
Does USDA have upfront mortgage insurance?
Do USDA loans have mortgage insurance?
USDA Rural Development (RD) Single-Family Housing Direct loans have no private mortgage insurance. USDA Guaranteed Loans are charged an annual guarantee fee instead of mortgage insurance. Guarantee fees are paid to USDA by the approved lender and are usually included in the homeowner’s monthly loan payment.
What is a USDA Rural Development Loan?
These loans are designed to help low- to moderate-income individuals and families in rural areas access affordable housing.Here are some key points about USDA loans: 1.**Zero Down Payment**: USDA loans
How much does USDA mortgage insurance cost?
Typically, USDA upfront mortgage insurance is rolled into your loan balance. Inspection fees: $300 to $500 for a property inspection to ensure USDA eligibility requirements are met. Closing costs: 2% to 5% of the home’s purchase price, including loan origination fees, appraisal fees, and title search fees.
How much does a USDA mortgage guarantee cost?
The USDA acts as a middleman between the buyer and lender when it comes to mortgage insurance. The guarantee fee is typically 1% of the total financed amount, meaning the total balance of the loan. Here’s a comparison of different loan types and their guarantee fees for a $200,000 mortgage: