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USDA loans are for rural homebuyers with low income who don’t qualify for any other type of loan. You must be buying your primary residence and not own another home to qualify for USDA financing.
The underwriting requirements for the loan are flexible and easy to qualify for, including low credit score requirements, and you don’t even need a down payment! But there’s the matter of the USDA guarantee fees. These fees can increase your closing costs and your loan’s monthly cost as you’ll pay the fees for the life of the loan.
Here’s everything you must know.
Understanding USDA Loan Guarantee Fees
USDA loans are among the most flexible loan programs available to low-income borrowers today. You don’t need a down payment to secure funding, and you can get by with a credit score as low as 640. This is a big risk for lenders, but the USDA guarantees the loans.
The USDA pays the lender back a portion of the funds they lost if a borrower defaults on the mortgage. The USDA then takes possession of the homes and tries to sell them to make their money back.
To offer the guarantee, though, the USDA needs an ‘insurance policy’ to cover the cost of defaulted loans, and the borrower (you) are responsible for covering the premiums.
Keep in mind that there’s more to the USDA loan than just qualifying. You and the property must be eligible. The USDA program is for low-income borrowers who don’t qualify for any other financing and buy a property in a rural area. Don’t worry, though, the USDA has flexible requirements regarding which homes are rural.
>> More: What Is Private Mortgage Insurance?
What Are the USDA Loan Guarantee Fees?
The USDA has two loan guarantee fees – an upfront fee that you pay at the closing and an annual USDA loan fee that you pay 1/12th of monthly. Neither fee is refundable if/when you sell the home or refinance, and you’ll pay the fees as long as you have the mortgage.
Understanding the fees and how you pay them is an important part of securing a USDA loan.
Upfront Guarantee Fee
The upfront guarantee fee is 1% of your loan amount. Let’s say you borrow $150,000. You’d have an upfront guarantee fee of $1,500. You can pay it at the closing along with your other closing costs or wrap it into your loan amount if you can’t afford to pay it upfront.
This is a one-time fee that you do not pay again during the life of the loan unless you refinance; then, you may pay a funding fee again.
Annual USDA Loan Fee
The annual USDA loan fee is a fee you pay ongoing for the life of the loan. It’s not like conventional loans with PMI that cancel once you owe less than 80% of the home’s value. You pay USDA loan fees for the life of the loan.
The annual USDA loan fees are 0.35% of the loan amount. If you borrowed $150,000, you’d pay $525 per year or $43.75 per month for USDA loan fees. As you pay the principal balance down each year, USDA loan fees decrease slightly.
How Do You Calculate the USDA Guarantee Fee?
It’s easy to determine your USDA guarantee fee. First, look at your loan amount and calculate 1% of it. You’ll need this amount to close the loan right off the bat.
Next, multiply the loan amount by 0.35%. This is your annual USDA loan fee, but you will pay it monthly, so divide the total by 12 to see how much you’ll pay monthly, and remember, you pay this for the life of the loan.
Bottom Line: USDA Guarantee Fees
The USDA guarantee fees increase the cost of borrowing money to buy a home, but the USDA keeps the fees affordable enough for low-income borrowers.
Think of the guarantee fees as an insurance policy that helps make you a less risky borrower. Without the guarantee, most lenders wouldn’t hand out 100% loans to borrowers with low credit scores and low income. The guarantee fees make it easier to qualify for the financing you need to buy your primary residence!