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USDA loans can be a great option for people who want to buy a home in a rural area and who might not qualify for other home loan options. It’s typical to need insurance on home loans in order to protect the lender, so let’s dive into what specific mortgage insurance is needed for USDA loans.
Do USDA Loans Have PMI?
USDA loans do not have PMI. PMI is used for conventional loans because the lender is assuming a higher level of risk. With USDA loans, the Department of Agriculture is taking on a portion of the risk by backing these loans. Instead of requiring mortgage insurance, USDA loans have a guarantee fee and annual fee.
Private Mortgage Insurance (PMI) is an insurance policy that is normally required when a borrower puts down less than 20% on a down payment. Usually, PMI is calculated as a percentage of the loan amount and is included in the monthly payments.
USDA Loan Mortgage Insurance
For USDA loans, borrowers are required to pay a guarantee fee and annual fee in place of mortgage insurance. The guarantee fee goes straight to the Department of Agriculture in order to cover any losses caused by borrowers defaulting on loans. The USDA acts as a middleman between the buyer and lender when it comes to mortgage insurance.
Upfront Guarantee Fee
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:
| Loan Type | Funding Fee Rate | Estimated Upfront Costs |
|---|---|---|
| USDA | 1% | $2,000 |
| FHA | 1.75% | $3,500 |
| VA | 2.15% | $4,300 |
USDA Annual Fee
As of September 2021, the annual fee for USDA guaranteed loans is 0.35% of the remaining principal balance. So, for example, if you have a USDA loan with a remaining principal balance of $100,000, the annual fee would be $350 (0.35% x $100,000).
Although it’s called the annual fee, this fee will be paid monthly as part of your monthly mortgage payment.
Bottom Line
Overall, USDA loans can be an excellent option for borrowers who want to buy a home in a rural area while minimizing expenses commonly associated with other loan programs.
