USDA mortgage insurance: Costs, guarantee fees, and how it works

USDA loans require borrowers to pay guarantee fees, which serve a similar purpose to mortgage insurance. USDA loans require homeowners to pay both a 1% upfront guarantee fee at closing and a 0.35% annual fee that’s added to your monthly payment for the life of the loan. These fees help the USDA guarantee your loan and pay for the ongoing rural loan program. Rocket Mortgage currently doesn’t offer USDA loans, but we can explain how they work so you understand all your borrowing options.

Key takeaways:

• USDA mortgage insurance is not required, but borrowers do pay upfront and annual USDA guarantee fees that serve the same purpose.
• Borrowers pay a 1% USDA upfront guarantee fee at closing and an ongoing 0.35% annual fee, which is divided into monthly payments.
• The annual fee remains for the full loan term, but USDA fees are generally lower than FHA mortgage insurance premiums and may be lower than PMI costs on a conventional loan.

Do USDA loans require mortgage insurance?

USDA loans technically don’t require mortgage insurance, but they do require guarantee fees that serve the same purpose. These fees back the mortgage guarantee, protecting lenders against financial losses if a borrower defaults on the loan.

Because the federal government absorbs a significant portion of the lender’s financial risk, mortgage lenders can offer USDA loans with favorable terms, lower interest rates, and a no down payment requirement to qualifying home buyers.

Do USDA loans have PMI?

No. Private mortgage insurance (PMI) is required on conforming conventional mortgages when the borrower puts down less than 20% of the purchase price.

A quick primer on USDA loans

U.S. Department of Agriculture home loans encourage economic growth and homeownership in rural and suburban areas. USDA loans require no down payment and feature competitive, fixed interest rates.

USDA loans are available to low- to mid-income borrowers buying a home in specific rural areas. Many areas of the country fall within eligible boundaries, though major metropolitan centers and immediate inner suburbs are excluded.

Rocket Mortgage currently doesn’t offer USDA loans.

Who qualifies for a USDA loan?

To qualify for a USDA mortgage, both the borrower and the property must meet specific requirements.

Income limits

Because USDA loans target moderate- to low-income buyers, your total household income cannot exceed 115% of the area median income (AMI) for the county where you are purchasing. Fannie Mae offers an AMI lookup tool.

Property location

The home must be in a USDA-designated rural or suburban area. Buyers can check address eligibility using the official USDA property map before making an offer. The USDA offers a property eligibility tool.

Credit

While the USDA does not set an absolute minimum credit score, a score of 640 or higher allows lenders to process applications through the USDA’s automated underwriting system, speeding up the approval process.

Debt-to-income ratio (DTI)

Standard DTI guidelines for USDA loans typically cap housing costs at 29% of gross income and total monthly debts at 41%.

How USDA guarantee fees work

The USDA mortgage insurance system uses two distinct fees to fund the program.

Upfront guarantee fee

The upfront guarantee fee is equal to 1% of the total loan balance. This one-time fee is assessed at closing. Most buyers choose to finance this cost by adding it to their loan amount rather than paying cash out of pocket.

Annual guarantee fee

The annual guarantee fee is equal to 0.35% of the remaining loan balance. It is calculated each year, divided into 12 installments, and added to your monthly mortgage payment.

How to calculate USDA guarantee fees

Calculating your fees is simple when you use the current fixed percentages:

• Upfront fee formula: Loan amount × 0.01
• Monthly fee formula: (Current loan balance × 0.0035) ÷ 12

USDA guarantee fee examples

Here is how the upfront and monthly guarantee fees break down across common loan amounts (assuming no initial down payment and financing the 1% upfront fee):

Does USDA mortgage insurance go away?

Unlike conventional PMI, the annual USDA guarantee fee cannot be canceled based on accumulating equity.

Does the annual fee for USDA mortgage insurance go away?

No, the 0.35% annual fee is required for the entire term of the loan.

Do USDA guarantee fees apply when refinancing?

Yes. If you refinance into another USDA mortgage, such as a USDA Streamline refinance, you will pay the 1% upfront fee and 0.35% annual fee on the new balance. The only way to eliminate USDA guarantee fees is to refinance into a conventional loan with at least 20% equity in the home.¹

USDA guarantee fees vs. mortgage insurance

Each loan type has its own way of guaranteeing the loan to protect lenders in case of default.

USDA guarantee fees vs. conventional PMI

Conventional loans charge PMI if you put down less than 20%, with annual premiums ranging from 0.1% to 2%. PMI can be canceled once you reach 20% equity, whereas USDA guarantee fees remain for the life of the loan.

USDA guarantee fees vs. FHA MIP

FHA loans charge a 1.75% upfront mortgage insurance premium (MIP) and an annual MIP with rates between 0.15% and 0.75%. You pay the annual fee for 11 years if you put down more than 10% and for the entire loan term if you put down less. USDA loans are generally cheaper, charging only 1% up front and 0.35% annually.

USDA guarantee fees vs. VA funding fee

VA loans charge a one-time VA funding fee between 1.25% and 3.3% and no monthly fee.² USDA loans have a lower upfront fee but require an ongoing monthly fee.

Pros and cons of USDA guarantee fees

Weighing the financial benefits against long-term costs helps determine if a USDA loan fits your goals.

Pros

• Zero down payment: Buy a home with 100% financing.
• Lower ongoing costs: The 0.35% annual fee is usually much lower than FHA MIP or conventional PMI.
• Financed upfront fee: The 1% fee can be rolled into the total loan balance to reduce out-of-pocket closing costs.

Cons

• Permanent monthly fee: The annual fee cannot be canceled as equity grows.
• Interest on financed fees: Rolling the 1% upfront fee into your loan balance increases your total interest paid over time.

FAQ

Here are answers to common questions about USDA mortgage insurance.

How much is mortgage insurance on a $300,000 loan?

On a $300,000 USDA loan, the 1% upfront fee is $3,000. Financing this fee creates a $303,000 total balance, making the initial monthly fee about $88.38.

How much is mortgage insurance on a $500,000 loan?

On a $500,000 USDA loan, the 1% upfront fee is $5,000. Financing this fee creates a $505,000 total balance, making the initial monthly fee about $147.29.

What is a USDA annual fee?

The USDA annual fee is a 0.35% charge based on your remaining loan balance, paid in 12 monthly installments to help maintain government backing for the program.

What does USDA mortgage insurance cover?

It covers financial losses incurred by the lender if a borrower defaults on the loan and enters foreclosure.

Is USDA mortgage insurance cheaper than FHA?

Yes. USDA loans require a lower upfront fee of 1% vs. 1.75% and a lower annual fee of 0.35% vs. 0.55% and up for standard FHA loans.

Does USDA have monthly mortgage insurance?

Yes. While technically designated as an annual guarantee fee, it is divided into 12 parts and added directly to your monthly mortgage payment.

The bottom line: USDA loans require a guarantee fee, not mortgage insurance

USDA loans charge guarantee fees rather than PMI, combining a 1% upfront fee with an ongoing 0.35% annual fee. Even though the annual fee lasts for the entire loan term, the low rates make USDA loans one of the most affordable pathways to zero-down homeownership.

While Rocket Mortgage currently doesn’t offer USDA loans, exploring all your borrowing options helps ensure you make the right financial move.

Speaking with a Home Loan Expert can help you compare conventional and government-backed programs so you can choose the mortgage that best fits your long-term goals.

¹ Refinancing may increase finance charges over the life of the loan.

² Rocket Mortgage is a VA-approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.