Government-backed loans always have some type of fee that they charge upfront and sometimes annually in order to fund their reserves. It might seem unfair, but it is these fees that make the programs available. If you these programs were not available, you would be stuck with conforming or subprime loans – conforming loans have Private Mortgage Insurance (unless you put down 20%) and subprime loans have higher fees and higher interest rates, so it is a wash either way. The USDA Guarantee Fee is what you pay on a USDA loan both at the onset of the loan and annually.
The Upfront USDA Guarantee Fee
The first guarantee fee you will pay with the USDA is the upfront fee. This fee is something you pay at the closing. As of right now, the fee is 2.75% of the loan amount. So for example, if you took out a $150,000 loan, you would pay $4,125 up front. The good news is that you do not need to fork over this money out of your own pocket. The lender will automatically add it to your loan amount, which can be up to 100% of the purchase price.
As of October 1st of this year, however, the USDA upfront fee will lower to 1% of the loan amount. The same practice will take place – you will still not need to bring the money to closing; the lender will add the 1% to the loan. What this means for you is a lower payment in the future for USDA loans.
The Annual USDA Fee
In addition to the upfront fee is the annual USDA Guarantee fee charged on every USDA loan. As of today, the amount charged is 0.5% per year. This means that you will pay 0.5% of the outstanding principal balance at your billing time each year. This number will obviously change throughout the years as the longer you have the loan, the more principal you will pay down. In the beginning, if you look at your amortization table, you will notice that you pay very little principal for a few years. After that point, however, the loan payments become less interest heavy and pay more towards the principal.
Just as the upfront guarantee fee will decrease as of October 1st of this year, the same is true for the annual guarantee fee. This fee will lower to 0.35% of the outstanding principal balance. The annual guarantee fee is never paid all at once, though. The USDA bills the lender for the full amount for the year, but the lender collects the money over the year with your mortgage payment. The amount that your annual guarantee fee is will get divided up into 12 payments, which you make throughout the year.
The Lowest Premiums
The good news is that the USDA guarantee fee or fees that you pay are among the lowest premiums charged for any program. The highest fees are usually the conventional private mortgage insurance rates and from there you have your FHA fees. If you want to compare the FHA fees to the USDA fees, see the following:
- FHA upfront mortgage insurance premium = 1.75%
- FHA annual mortgage insurance premium = 0.85%
For a few more weeks, the FHA upfront premium will be slightly lower than the USDA upfront fee, but the annual fee is already higher for the FHA loan, which makes the FHA loan more expensive over the life of the loan. After October 1st, the USDA loan will be cheaper, hands down.
The good news is when you pay the USDA guarantee fee either upfront or annually, you are helping the program stay available. The USDA loan is among the most flexible and affordable for homebuyers in rural areas, making it easy to build certain areas of the United States back up. The loan helps families that have low to moderate income and that need help getting financing. One of the most unique aspects of the program is that it allows the income from all household members to be used as a compensating factor in order to help you qualify for the loan.
If you are looking for a home in a rural area, it really pays to try the USDA loan.