If you dream of buying a home in a quiet rural community or a charming small-town suburb but dread the thought of scraping together a huge down payment, a USDA loan might be exactly what you need.
These loans, backed by the U.S. Department of Agriculture, open the door to homeownership with competitive interest rates, flexible credit standards, and no down payment required. However, to help sustain the mortgage program and these benefits, they charge a fee (1% upfront and 0.35% annually) on all USDA guaranteed loans.
How Does the USDA Guarantee Fee Work?
There are USDA direct loans and guaranteed loans. The government directly funds USDA direct loans, so they tend to have lower interest rates than USDA guaranteed loans. They also don’t require the guarantee fee. However, USDA direct loans have much stricter income requirements, so most buyers use the USDA guaranteed loan.
USDA guaranteed loans are funded by private lenders but backed by the USDA and have much less strict income requirements. The guarantee fee is only charged if you use the USDA guaranteed loan.
This fee isn’t a sneaky way for the USDA to make a profit. Instead, it’s a self-sustaining funding mechanism that keeps the program running strong. The money collected from guarantee fees helps cover potential losses if a borrower defaults, keeps the program operating without relying solely on taxpayer funding, and allows the USDA to continue offering valuable benefits like 0% down payment requirements.
Upfront Guarantee Fee
The upfront guarantee fee is a one-time cost charged at closing, equal to 1% of your total loan amount. The great news is that you don’t have to pay it out of pocket if you don’t want to.
The USDA allows you to roll this fee into your loan balance, so you can keep your savings intact for moving costs, furniture, or even a little backyard BBQ to celebrate your new home.
For instance, let’s say you purchase a home for $200,000. Your loan amount would also be $200,000, and the upfront guarantee fee of 1% would total $2,000. If you roll that fee into your loan, your total loan amount becomes $202,000.
Annual Guarantee Fee
In addition to the upfront fee, USDA loans also include an annual guarantee fee, currently set at 0.35% of your loan’s remaining principal balance. You also don’t have to pay this fee as a lump sum; instead, it’s divided into 12 monthly installments and added directly to your mortgage payment, making it easy to budget for.
So, if your initial loan balance is $200,000, 0.35% works out to $700 annually, or about $58.33 per month. Over time, as you pay down your mortgage, this fee decreases. Five years into your loan, your balance might be around $180,000, lowering the annual fee to $630, or roughly $52.50 per month.
USDA Guarantee Fee vs. Mortgage Insurance
The USDA loan guarantee fee is often compared to private mortgage insurance (PMI) on conventional loans and mortgage insurance premiums (MIP) on FHA loans. All three serve the same basic purpose—protecting the lender if you can’t make your payments—but they vary in cost and structure.
Mortgage Insurance Costs by Loan Type
| Loan Type | Upfront Cost | Annual Cost | When It Ends |
|---|---|---|---|
| USDA | 1% upfront guarantee fee | 0.35% annual guarantee fee | Lasts for the life of the loan |
| FHA | 1.75% upfront MIP | 0.55%–0.85% annual MIP | Lasts for life of loan (if <10% down) |
| Conventional | None | 0.3%–1.5% PMI | Can be removed once you reach 20% equity |
On a $200,000 home, a USDA loan would cost about $2,000 upfront and roughly $700 per year. An FHA loan, by comparison, would require $3,500 upfront and about $1,400 per year. Keep in mind that annual FHA MIP rates vary depending on your down payment size and loan amount.
A conventional loan with PMI wouldn’t have an upfront fee, but the yearly cost could range from $1,500 to $3,000, depending on your credit score. Since the USDA loan’s annual cost is lower, it can be a more budget-friendly choice for buyers planning to stay in their home long-term.
USDA Guarantee Fee vs. VA Funding Fee
The USDA guarantee fee is sometimes compared to the VA funding fee, which applies to VA loans for eligible military service members, Veterans, and certain surviving spouses. Both fees help keep their programs financially healthy while offering no down payment requirements.
Check out how they stack up:
| Feature | USDA Loan | VA Loan |
|---|---|---|
| Upfront Fee | 1% guarantee fee (flat rate) | 1.25% – 3.3% Funding Fee (varies by service history, loan type, and first vs. subsequent use) |
| Exemptions | No exemptions | Exemptions available for Veterans with service-connected disabilities |
| Annual Fee | 0.35% of remaining loan balance (for life of loan) | None |
| Example on $200,000 Home | $2,000 upfront + ~$700 per year | $2,600 – $3,300 upfront; $0 annual fee |
| Cost Advantage | Lower upfront cost | More cost-effective long-term (especially with funding fee exemption) |
The USDA loan guarantee fee might sound like just another expense, but it actually makes the program’s incredible perks, like no down payment, possible. Compared to other loan types, the USDA fee structure is budget-friendly and straightforward, especially for buyers who want to preserve cash at closing.
If you’re interested in this program, you can check your eligibility online, and a Neighbors Bank loan expert will be in touch.
With over 11 years in the mortgage industry, Matt Roy has spent the last 7 years as an underwriter. He’s passionate about understanding the “why” behind lending decisions and helping homebuyers succeed.
