No-money-down USDA loans can make home buying easier for borrowers who satisfy the program’s rules for income and geography.
If USDA loans have a catch for eligible borrowers, it’s probably the USDA Loan Guarantee Fee, which is the USDA’s version of mortgage insurance.
The USDA fee is lower than similar fees on similar loans, but USDA borrowers should still be aware of this fee and how it works.See if you qualify for a zero-down USDA loan.
What’s in this article?
USDA Guarantee Fee and Annual Fee 2022-2023
→Upfront Guarantee Fee: 1% of the loan amount (can be rolled into the loan)
→Annual Fee: 0.35% of the loan amount per year, equaling $29 per month per $100,000 borrowed.
What is the USDA Loan Guarantee Fee?
A lot of home buyers hate paying mortgage insurance. Mortgage insurance protects the lender, in case the buyer defaults, but it’s the borrower who pays the insurance bill. This seems unfair or unnecessary to many borrowers.
USDA says it does not require mortgage insurance. This is true. But the USDA charges a Guarantee Fee which serves a similar purpose.
The USDA charges two separate fees to borrowers:
- USDA Guarantee Fee: This one-time fee is often added to a loan’s balance
- USDA Annual Fee: The USDA breaks this annual fee into monthly installments added to each monthly payment
Nobody likes paying extra fees, but the USDA’s fees can be money well spent. They help borrowers attain home loans with no money down. This is a huge home buying perk.
How much is the USDA Guarantee Fee in 2022-2023?
New USDA loans currently charge an upfront USDA Guarantee Fee of 1%.
This 1% fee means a $300,000 loan would become $303,000. (Or the buyer could pay the $3,000 in cash upfront and still borrow only $300,000.)
Sometimes, the USDA adjusts its fees for new loans. Federal law allows this upfront fee to reach as high as 3.5% on future loans. But for now, it’s much less.
How much is the USDA Annual Fee in 2022-2023?
The USDA annual fee costs 0.35% of the loan amount each year. This fee is broken into 12 monthly installments which are added to the loan’s monthly payment.
So, a $300,000 loan balance would require $1,050 in annual fees. That’s $87.50 a month.
As the loan balance goes down each year, so does its annual fee. For example, a $200,000 loan balance would charge a monthly fee of about $59; with a $100,000 loan balance, the USDA would add about $29 to each monthly payment.
In the future, the USDA could adjust its annual fee as high as 0.5%. But once you’ve closed your loan, your fees will remain the same. Future fee increases affect only new loans.Become a homeowner. Start by applying for a USDA home loan.
About the USDA Annual Fee
A lot of home buyers think they’re borrowing money from the federal government when they use a federal home loan program. In reality, the government’s role, with most of these loans, is to insure private lenders.
When you get a USDA Guaranteed loan, the U.S. Department of Agriculture insures your private mortgage lender. USDA insurance means the lender shouldn’t lose money — even if you stop making payments and the bank has to foreclose. This extra layer of security allows the lender to take a bigger risk by approving loans with no down payment.
Insuring mortgages costs money. Rather than relying on general tax revenue to insure private mortgage loans, the USDA charges home buyers upfront and annual fees.
The Federal Housing Administration does the same thing, except FHA mortgage insurance premiums (MIP) are typically higher — and buyers must put at least 3.5% down. VA loans also charge fees: First-time buyers pay 2.3% upfront but no annual fees.
What about conventional loans? They require no upfront mortgage insurance fees, but their annual private mortgage insurance (PMI) can reach 1.5% for some borrowers who don’t put 20% down. Unlike most government mortgage insurance, PMI can be canceled without refinancing later.
Learn more about USDA loans. Sign up.
Paying for the Guarantee Fee & Annual Fee
As a borrower, you could pay the upfront Guarantee Fee is one of several ways. You could:
- Pay the fee in cash at closing
- Roll the fee into the loan amount. You can do this even if the extra 1% pushes the loan amount above the home’s appraised value
- Ask the seller to pay the fee. The seller could pay up to 6% of the loan amount in closing costs, including the Guarantee Fee
- Use money from friends or family members. Donors would need to submit a gift letter to tell the lender they don’t expect to be repaid later
- Ask the lender to pay the upfront fee. But this will likely result in a higher interest rate, so you’ll really be paying it
There’s only one way to pay the USDA Annual Fee: monthly along with your mortgage payment. Each time you make a monthly payment, you’re paying 1/12 of the annual fee.
USDA Guarantee Fee vs FHA MIP vs Conventional mortgage insurance
How does the USDA Loan Guarantee Fee compare to fees on other types of loans?
|Upfront mortgage insurance/equivalent||1%||1.75%||Not required|
|Ongoing mortgage insurance/equivalent||0.35%||0.85%||0.5% to 2% depending on borrower (unless 20% down)|
|When does ongoing MI drop off?||Never||Never, unless buyer paid >10% down (11 years in that case)||Cancellable when loan balance falls to 80% LTV|
|Refundable upfront mortgage insurance/equivalent?||No||Part of FHA upfront MIP is refundable when refinancing into an FHA streamline loan within 3 years||N/A|
Here are examples of mortgage insurance fees in real dollars
|Base loan amount||$250,000||$250,000||$250,000|
|Upfront fee percentage||1%||1.75%||None|
|Upfront fee in dollars||$2,500||$4,375||None|
|Final loan amount||$252,500||$254,375||$250,000|
|Monthly mortgage insurance or fee %||0.35% (0% down)||0.85% (3.5% down)||0.99% (3% down, 700 score)|
|Monthly mortgage insurance or fee $||$74||$180||$206|
|Monthly principal, interest, and MI payment (6.5% rate)*||$1,670||$1,788||$1,786|
*Rates and payments are for example purposes only and do not include taxes, insurance, or HOA dues. Your costs will vary.
In this example, USDA is the clear winner from a monthly payment perspective. Not only does it cost less upfront, due to allowing zero down, but its mortgage insurance fees are also lower than for FHA and conventional.
FAQs about USDA loan fees
The USDA Guarantee Fee is 1% of the loan amount and can be rolled into the loan. The Annual Fee is 0.35% of the loan amount per year, paid in monthly installments with the mortgage payment. It equals $29 per month per $100,000 borrowed.
No. The USDA’s one-time, upfront Guarantee Fee is non-refundable, unlike the FHA’s upfront mortgage insurance premium. With FHA, buyers have up to three years to reuse part of their loan’s upfront fee if they replace their existing FHA loan with a new FHA streamline refinance.
No. The USDA Annual Fee remains in place for the life of the loan. But you could refinance later into a conventional loan when you have 20% equity, to eliminate the fee.
A lot of buyers consider USDA Loan Guarantee Fees a drawback to USDA loans, but current fees are relatively low, and they allow the USDA program to exist. A bigger downside to this program is its limited availability. USDA home buyers must purchase a home in a rural area, as defined by the USDA, though many areas are solidly suburban. They must also earn 115% or less of their area’s median income. Conventional and FHA loans don’t have income or geographical limits.
Become a homeowner with a USDA loan
It’s understandable that home buyers resist paying fees. After all, we live in a world where fees — like “dealer fees” when you buy a car or “restocking fees” when you return a cell phone — seem inexplicable and unnecessary.
USDA loan fees are different. When you pay these fees, you’re getting a valuable service in exchange for your money.
You’re getting access to a home loan with no money down, low rates, and easier approval to build toward your own financial future instead of paying rent.See if you qualify for a zero-down USDA loan.