USDA Mortgage On Rural Home With Land

Do USDA Loans Require Mortgage Insurance? A Guide To The USDA Guarantee, Or Funding, Fee

Molly Grace4-minute read

May 20, 2021

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*As of July 6, 2020, Quicken Loans® is no longer accepting USDA loan applications.

With 0% down and relatively low overall costs compared to other mortgage types, USDA loans are an incredibly affordable option for home buyers in eligible rural and suburban areas.

However, low or no down payment mortgage programs often come with costs in other areas to offset the risk that comes with that. Most often, this comes in the form of mortgage insurance.

Do USDA loans come with mortgage insurance, and if so, how much does it cost? Let’s look at everything borrowers need to know about USDA mortgage insurance.

A Quick Primer On USDA Loans

USDA loans are a type of mortgage. They’re geared toward lower-income home buyers in areas deemed rural by the U.S. Department of Agriculture, the agency that guarantees these loans.

You can use the USDA’s property eligibility map to see which areas are eligible for USDA loan funding. Land-wise, most of the U.S. is eligible for USDA funding; ineligible areas include cities and the areas immediately surrounding them.

USDA loans don’t require a down payment, which removes a substantial barrier to homeownership that many would-be home buyers encounter. After all, a 3% down payment – the lowest you can go on a conventional loan – on a $250,000 home is $7,500. For those on lower or middle incomes, saving that much can take a long time.

Plus, allowing borrowers to get a mortgage with 0% down means they can hold onto their cash for other purposes, such as home improvements or emergency savings.

When it comes to interest rates, USDA loans are comparable to VA loans in that these mortgages typically offer lower rates than other loan programs, such as conventional or FHA loans.

Great news! Rates are still low in 2021.

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What Is Private Mortgage Insurance, And Does The USDA Require It?

Typically, if a lender allows a borrower to buy a house with a low down payment, they’ll require that the borrower pay to insure their loan with mortgage insurance. This is because when you make a lower down payment, the risk for the lender is larger than if you made a down payment of at least 20%. Mortgage insurance helps to protect the lender from that risk.

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. On FHA loans, mortgage insurance is referred to as a mortgage insurance premium (MIP). MIP is required on all FHA loans and comes with both an upfront premium and an annual premium. If you make a down payment of less than 10%, you’ll pay mortgage insurance for the life of the loan. If you make a down payment of 10% or more, you’ll pay it for 11 years.

VA loans don’t have mortgage insurance, but borrowers do pay a funding fee, which is charged as a certain percentage of the loan amount and either paid at closing or rolled into the loan amount.

What Is The USDA Annual Guarantee, Or Funding, Fee?

So, what about USDA loans? Similar to VA loans, USDA loans don’t technically require mortgage insurance, but they do have what’s called a guarantee fee, which works like mortgage insurance in helping to guarantee the loan.

When a government agency backs a loan, such as a USDA loan or an FHA loan, they’re essentially providing insurance to the lender. If the borrower defaults on a government-backed loan, that agency pays the lender to help them recoup their losses. Fees that come with these loan programs, such as the guarantee fee, help pay for that insurance.

How Does The Guarantee Fee Work?

The USDA guarantee fee – which you may sometimes see referred to as a funding fee – comes in two parts: an upfront fee and an annual fee.

Upfront Fee

USDA loans currently come with a 1% upfront guarantee fee. This means that you’ll pay 1% of the loan amount.

Though it’s called an “upfront” fee, you don’t necessarily have to pay it upfront yourself. USDA loan borrowers can choose to include the cost of their upfront guarantee fee in their loan.

Annual Fee

USDA loans also come with annual fees, though you won’t actually pay it once per year in a lump sum. Instead, you’ll pay a portion each month as part of your monthly mortgage payment.

The annual fee is equal to 0.35% of your loan balance.

Example

Let’s say you’re buying a $250,000 home with no down payment. Your upfront guarantee fee is 1% of this, or $2,500.

If you choose to roll this cost into your loan rather than pay it out of pocket, the USDA will allow you to get a loan for $252,500 to cover the cost of the home as well as your guarantee fee.

Then comes your annual fee: 0.35% of $252,500 is $883.75. You’ll pay this over the course of the year, so divided by 12 months, your monthly fee will be equal to $73.65.

Which Is Better: Paying PMI, MIP Or The USDA’s Guarantee Fee?

How do the costs of USDA loans compare to other mortgage types? Let’s look at the typical costs that you’ll pay when purchasing a home with each one of these mortgages.

Loan Type

Upfront Fee

Annual Fee

USDA

1%

0.35%

FHA

1.75%

0.45% – 1.05%

Conventional

N/A

0.58% – 1.86%

VA

1.4% – 3.6%

N/A

 

The exact cost of PMI on conventional loans can vary depending on a variety of factors, including your credit score and the loan-to-value ratio. PMI rates are typically between 0.58% – 1.86% of the loan amount each year.

For FHA and VA loans, your exact mortgage insurance or funding fee costs will depend on certain aspects of your loan, such as the size of your down payment and, in the case of VA loans, whether you’ve used the program before.

Do I Have To Pay The Guarantee Fee If I’m Refinancing?

Yes. Whether you’re purchasing a home or refinancing your current mortgage with a USDA loan, you’ll pay a 1% upfront guarantee fee and a 0.35% annual fee.

The Bottom Line: The USDA Guarantee Fee Helps Make These Loans More Affordable For Borrowers

The guarantee fee is the tradeoff for a loan program that allows borrowers to get into a home with 0% down. Compared to other popular loan options, USDA loans are affordable and accessible for low- to middle-income folks living in eligible areas.

For more information, check out our guide to the many first-time home buyer programs, loans and grants that are available to help make homeownership more affordable for you.

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Molly Grace

Molly Grace is a staff writer focusing on mortgages, personal finance and homeownership. She has a B.A. in journalism from Indiana University. You can follow her on Twitter @themollygrace.