USDA Guarantee FeeCASAPLORERTrusted & Transparent
What You Should Know
- A USDA guarantee fee is a fee that replaces mortgage insurance for USDA loans.
- In 2019, the USDA has set the upfront guarantee fee to 1% of the loan amount and the annual fee to 0.35% of the loan amount.
- Many conventional and unconventional loans have a certain type of mortgage insurance, but the USDA guarantee fee is the cheapest mortgage insurance available.
What Is a USDA Guarantee Fee?
USDA guarantee fee is specific to USDA loans, so it is important to understand what a USDA loan is before discussing the USDA guarantee fee. USDA loans are non-conventional mortgage loans that are backed by the US Department of Agriculture. These loans target people who are planning to buy a property in a rural area of the United States. Before choosing a property, a borrower should look at a USDA eligibility map to ensure that they are able to purchase a property in a desired area using USDA loan. Using a USDA loan, a borrower can get a mortgage for a property with a 0% down payment. For comparison, a conventional loan usually requires a 20% down payment. It is possible to get a conventional loan with a minimum of 5% down payment, but the borrower will have to pay for private mortgage insurance in this case.
USDA loans have quite a few perks that make them a very attractive option for homebuyers. Unfortunately, not everyone may be eligible for this type of loan. There are certain financial requirements that must be met by the borrower to qualify for the loan.
|Status||US Citizen or Lawful Permanent Resident|
|Location||Population < 20,000|
|Type of Residence||Primary Residence|
|Household Income||< 115% Median Income|
|Debt-to-Income Ratio||< 41%|
USDA does not have a down payment requirement. This means that USDA allows down payment to be as low as0%, and it does not require private mortgage insurance regardless of loan-to-value (LTV) ratio. Even though it does not require any additional payments as conventional loans do, there are a few fees that need to be considered. Instead of requiring borrowers to get private mortgage insurance, the banks charge guarantee fees on USDA loans. There are two types of guarantee fees: upfront fee and annual fee. An upfront fee is charged at the time of loan origination, and it is equal to 1% of the loan amount. An annual fee is a recurring fee that is charged annually, and it is equal to 0.35% of the loan amount. The structure of guarantee fees is very similar to the structure of private mortgage insurance. The most important difference between them is the fact that the guarantee fees should be cheaper than private mortgage insurance.
The USDA Guarantee Fee for 2022
In 2019, the USDA has set the upfront guarantee fee to 1% of the loan amount and the annual fee to 0.35% of the loan amount. Since 2019, the USDA has not updated its fee structure. Some lenders allow rolling the upfront guarantee fee into the loan amount. This way, a borrower does not have to pay an upfront guarantee fee at the loan origination. Instead, they can pay it off in monthly installments with the mortgage. In this case, the borrower does not have to pay in the beginning, but they will have to bear higher interest payments during the loan lifetime. These fees are charged by the USDA to the lender who passes down the fee to the borrower in terms of a higher interest rate. This fee is paid by the borrower on a monthly basis.
To illustrate, suppose a prospective homebuyer is planning to get a USDA mortgage for a $300,000 house with no down payment. In this case, the principal of the mortgage is $300,000. At the time of loan origination, among other closing costs, the borrower would have to pay $3,000 upfront as a guarantee fee. Additionally, the borrower has to pay $1,050 as an annual guarantee fee for the first year. This means that the borrower will be charged$87.50 each month for the first year. It is important to note that the guarantee fee is based on the principal amount. Since principal outstanding decreases over time, the annual guarantee fee decreases over time too.
Mortgage Insurance Rates
Most mortgages that have an LTV ratio of over 80% pay some kind of mortgage insurance. Conventional mortgages usually require private mortgage insurance. FHA loans charge mortgage insurance premiums (MIP). USDA loans have a guarantee fee. All of these premiums are designed to provide insurance against default, so it is possible to compare the cost of all of them. It is important to note that private mortgage insurance for conventional loans comes with different fee structures. For comparison, we look at the most common type of private mortgage insurance, which charges a borrower monthly interest without an upfront fee.
|Mortgage Insurance Rates By Loan Type|
|Fee Type||Conventional Loans||FHA Loans||USDA Loans||VA Loans|
|Upfront Fee||0%||1.75%||1%||Up to 3.6%|
|Annual Fee||0.5% - 2%||0.45% - 1.05%||0.35%||0%|
It is clear that USDA loans have the cheapest mortgage insurance rate out of all three. Even though private mortgage insurance for conventional loans does not require an upfront payment, their annual fee tends to be much higher than the annual fees for FHA and USDA insurances. Because of that, it is safe to assume that private mortgage insurance costs the most over the lifespan of the loan while USDA tends to have the lowest insurance rate out of all three.
It is important to note that not all loans require insurance. For example, a conventional loan requires insurance only while the LTV ratio is over 80%. As soon as the LTV ratio is less than 80%, the borrower may stop paying for private mortgage insurance. Some FHA loans require mortgage insurance premium payments only for 11 years. On the other hand, a USDA guarantee fee is paid monthly on all USDA loans regardless of the loan amount or LTV ratio. Because it is paid throughout the lifetime of the loan, the premium might become relatively expensive if the mortgage rates stay low enough. It is always beneficial to look at as many options as possible before choosing to originate a loan.