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Everything to Know About USDA Mortgage Insurance

Key Learnings

  • USDA loans do not have PMI
  • USDA borrowers are required to pay a 1% guarantee fee upfront
  • USDA loans also include a 0.35% annual fee paid monthly
By Neighbors Bank Team May 23, 2023

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.

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.

Written by:
Neighbors Bank Team
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