Homebuyers who cant put down a sizable down payment with a conventional loan will often need to pay for PMI, or private mortgage insurance. This insurance is designed to protect the lender in the event you default on your loan.
For conventional loans, you’ll typically need to pay for PMI unless you can put down 20 percent of the purchase price. You can cancel PMI for conventional loans once you’ve paid off at least 20 percent of the loan value.
“USDA loans don’t have PMI. But these specialized loans require two different forms of mortgage insurance: an upfront guarantee fee and an annual fee that serves as the monthly mortgage insurance premium.” Said Sam Sexauer of Neighbors Bank. “Despite having two fees, the total costs of USDA mortgage insurance are often significantly lower than other loan options.”
In fact, mortgage insurance costs on FHA and conventional loans can be double or even triple those of USDA mortgages, posing a serious barrier for low-income and cash-strapped buyers.
Buying a home is an exciting milestone, but it also represents a major financial commitment. And for many first-time homebuyers, coming up with a down payment can be a daunting hurdle. That’s where unique mortgage programs like USDA loans come in. USDA loans help make homeownership affordable by requiring no down payment.
But low down payment loans often have tradeoffs, like mortgage insurance. So how does mortgage insurance work with USDA loans? Do you have to pay it and if so how much does it cost? This comprehensive guide covers everything you need to know about USDA loans and mortgage insurance.
Let’s start with an overview of USDA loans and how they work
USDA loans are government-backed mortgages offered through the U.S. Department of Agriculture’s Rural Development program. They help low- to moderate-income borrowers in eligible rural and suburban areas buy homes with no down payment.
The USDA doesn’t lend money directly. Instead, they guarantee a portion of USDA loans made by approved private lenders. This reduces risks for the lenders and allows them to offer very low or no down payment options.
To qualify for a USDA loan, borrowers must meet income limits set by the USDA for their county. Credit scores of 640 or higher are usually required as well. The home must be located in a USDA-designated rural area.
USDA mortgages come with competitive interest rates, and the loans can be used for buying, building, repairing or improving a home. Refinancing an existing USDA loan is also an option.
How Mortgage Insurance Works
Most mortgages that allow low down payments require mortgage insurance. This protects the lender from losses if the borrower defaults.
There are a few main types of mortgage insurance:
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FHA Mortgage Insurance: Required on FHA loans, includes upfront and annual premiums.
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Conventional PMI: Required on conventional loans with less than 20% down, annual fee based on loan amount.
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USDA Guarantee Fee: Acts like mortgage insurance on USDA loans.
So how do these fees work, and what are typical costs?
FHA Mortgage Insurance
FHA loans require:
- Upfront MIP – 1.75% of the loan amount
- Annual MIP – 0.45% to 1.05% of the loan amount per year
On a $200,000 FHA loan, you’d pay a 1.75% upfront premium ($3,500) plus $900 to $2,100 annually for mortgage insurance.
Conventional PMI
Conventional PMI rates range from 0.1% to 2% annually based on your down payment amount and credit score.
With a $200,000 conventional loan and 5% down, PMI may cost between $167 to $333 per month.
USDA Annual Guarantee Fee
USDA loans have guarantee fees instead of PMI:
- 1% upfront fee
- 0.35% annual fee
We’ll take a closer look at these next.
USDA Loan Guarantee Fees
The USDA uses an upfront and annual guarantee fee rather than private mortgage insurance. Here’s how they work:
The Upfront Guarantee Fee
This 1% fee is similar to the upfront MIP on FHA loans. It’s equal to 1% of your total USDA loan amount.
On a $200,000 loan, your upfront fee would be $2,000. Many lenders let you roll this cost into your loan amount rather than pay it upfront in cash.
The Annual Guarantee Fee
This functions like the annual mortgage insurance premiums on FHA loans. The annual guarantee fee is 0.35% of your loan balance per year.
On that $200,000 loan, your annual fee would be $700 (0.35% of $200,000). However, you don’t have to pay this all at once annually. It’s divided into monthly payments, so you’d pay roughly $58 per month.
The annual fee lasts for the life of the USDA loan. Even if you make extra payments and reduce your principal balance, you’ll keep paying 0.35% of the current remaining balance each year.
How Do USDA Fees Compare to Other Loans?
Since they act like mortgage insurance, how do USDA loan guarantee fees compare to PMI and MIP on conventional and FHA loans?
Here’s an overview of typical costs based on a $200,000 loan with 5% down:
| Loan Type | Upfront Fee | Annual Fee |
|---|---|---|
| USDA | 1% of loan amount ($2,000) | 0.35% of balance per year (~$58/month) |
| FHA | 1.75% of loan amount ($3,500) | 0.8% – 1.05% of balance per year (~$133-$175/month) |
| Conventional | None | 0.5% – 1% of loan amount per year (~$83-$167/month) |
As you can see, USDA loans tend to have lower monthly mortgage insurance costs than FHA loans or conventional loans with PMI.
The upfront fee is higher than conventional loans but lower than FHA. Overall, USDA mortgages provide affordable options for qualifying borrowers.
Can I Cancel USDA Mortgage Insurance?
With conventional loans, you can typically request to cancel PMI once you reach 20% equity in the home. But mortgage insurance on government-backed loans like USDA and FHA mortgages lasts for the full loan term.
The USDA does not allow you to cancel mortgage insurance, even if you make a down payment or pay down your loan early. The annual 0.35% guarantee fee lasts for the entire term of your USDA loan.
However, because USDA mortgage insurance costs are relatively low, keeping this coverage for the long haul is not usually too burdensome. The guarantee fee provides continued protection for lenders while helping borrowers access affordable USDA financing.
Tips for Getting the Best USDA Loan Rate
While USDA loans offer competitive rates, you can take steps to qualify for the lowest possible interest rate:
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Shop around – Compare rates from multiple USDA lenders to find the best deals. Credit unions often have excellent rates.
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Boost your credit – Aim for a credit score over 740. Pay down debts and correct any errors on your credit reports.
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Lower your DTI – Total monthly debt payments plus the new mortgage payment should be below 41% of gross monthly income. Pay off credit cards.
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Make a down payment – Even a small 3-5% down payment can help you qualify for a better interest rate.
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Shorten loan term – Opt for a 20 or 25-year fixed term instead of 30 years to get a lower rate.
The Bottom Line
Thanks to their low or no down payment options, USDA loans make homebuying attainable for many rural residents. While you will have to pay mortgage insurance fees, these costs are very reasonable compared to other low down payment loans.
Just be sure to select a reputable USDA lender, shop around for the lowest rates, and take steps to improve your credit profile. This can help you get the most affordable financing deal possible.
With the right USDA mortgage, you can finally achieve the dream of homeownership, even with limited savings. USDA loans open doors to underserved communities and provide fair access to credit. If you think you may qualify, be sure to explore this option when buying or refinancing in a rural area.
USDA Mortgage Insurance Fees
USDA mortgage insurance is paid via two fees: an upfront guarantee fee equal to 1 percent of the loan amount, and an annual fee equal to 0.35 percent of the loan amount.
The one-time upfront guarantee fee, which is also referred to as the USDA funding fee, is paid at closing and typically financed into the loan.
The annual fee is lumped into your monthly payment and is paid for the life of the loan.
Calculating the USDA Annual Fee
In addition to the USDA origination fee, you will also have an annual fee of 0.35 percent of the loan’s balance. The annual fee is calculated annually, but paid monthly as part of your monthly mortgage payment.
USDA loan annual fees are recalculated at the anniversary of the loans closing date every year, then spread evenly out in 12 equal payments.
Heres an example of how to calculate your USDA annual fee:
| Base Loan Amount |
|---|
| Funding Fee |
| Total Loan Amount = Base Loan Amount + Funding Fee |
| Annual Fee = Total Loan Amount x 0.35 percent |
| Monthly Payment = Annual Fee / 12 |
Annual fees for USDA and FHA loans are paid for the life of the mortgage, while VA loans only require the upfront funding fee.
Check Official USDA Loan Requirements
USDA and Mortgage Insurance
FAQ
Do you pay mortgage insurance with an USDA loan?
Does mortgage insurance go away on a USDA loan?
What is the annual insurance for USDA RHS guaranteed loans?
What is the maximum DTI for a USDA loan?
What is a USDA mortgage?
USDA mortgages are aimed at borrowers buying in eligible rural areas. These loans come with lenient rules around credit scores and down payment requirements. USDA loans come with income limits that vary by location. USDA loans are one of many options available to finance a home purchase.
Do borrowers have to pay USDA mortgage insurance?
No, borrowers must pay USDA mortgage insurance for the lifetime of the loan. Borrowers wishing to remove the annual premium for the USDA guarantee fee would have to refinance into a new, non-USDA loan. How is USDA mortgage insurance calculated? For USDA mortgage insurance, the upfront guarantee fee is 1% 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:
Does USDA pay upfront mortgage insurance in cash?
USDA upfront mortgage insurance is not paid in cash. It’s added to your loan balance, so you pay it over time. Before the loan is approved, the property will need to be inspected to ensure it meets USDA property eligibility requirements.