As of October 1, 2016, the USDA lowered the upfront and ongoing mortgage insurance fees for the USDA Guaranteed Home Loan Program. The USDA Home Loan Program enables eligible borrowers to buy homes located in federally-designated rural areas with no down payment. The program is designed to help individuals with low-to-moderate incomes afford to buy homes in rural communities. USDA guaranteed home loans are available through approved lenders such as banks, mortgage brokers, mortgage banks and credit unions but the loans are backed, or insured, by the USDA.
The USDA charges borrowers upfront and ongoing monthly fees to provide insurance that protects lenders in the event that borrowers default on their mortgage and cannot repay their loan. These fees are similar to upfront and ongoing FHA mortgage insurance premium (MIP) for an FHA home loan or the monthly private mortgage insurance (PMI) fee for a conventional loan. The upfront USDA mortgage insurance fee is also called a guarantee fee and the ongoing mortgage insurance fee is known as an annual fee (even though borrowers pay the fee monthly along with their mortgage payment).
On October 1st, the USDA reduced the upfront mortgage insurance fee from 2.0% of the loan amount to 1.0% of the loan amount and reduced the ongoing annual insurance fee from 0.5% of the loan amount to 0.35% of the loan amount. The reduction in the upfront and ongoing USDA mortgage insurance fees reduces closing costs and total monthly housing expense for borrowers.
For example, based on the lower fees, for a $200,000 loan the upfront guarantee fee is reduced from approximately $4,080 to $2,020 and the ongoing monthly fee is reduced from $85.00 to $59.00. The example below demonstrates how the fees are calculated.
Up-front USDA mortgage insurance or guarantee fee
- First, we calculate the total mortgage amount including the the upfront USDA mortgage insurance fee:
- $200,000 (mortgage amount before USDA mortgage insurance) + $2,000 (upfront USDA mortgage insurance) = $202,000 total mortgage amount
- $202,000 (total mortgage amount) * 1.0% (upfront USDA mortgage insurance fee) = $2,020 (up-front USDA mortgage insurance fee)
Ongoing monthly USDA mortgage insurance fee
- $202,000 (total mortgage amount) * .35% (ongoing annual USDA mortgage insurance fee) = $707 (ongoing annual USDA mortgage insurance fee) / 12 months = $59.00 monthly USDA mortgage insurance fee
Reducing mortgage insurance fees for the USDA home loan program should make home ownership more attainable for more borrowers, especially for people who can afford to make a monthly mortgage payment but who may struggle to save money for closing costs.
FREandCLEAR provides a comprehensive overview of the USDA Home Loan Program including borrower qualification requirements and property eligibility guidelines. We also encourage you to use our USDA Home Loan Calculator to determine what size USDA loan you can afford as well as the upfront and monthly USDA mortgage insurance costs based on the new, lower guarantee and annual fee rates.