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USDA Loan Rates, Lenders, Guidelines and Information

Do you Have to Pay PMI on a USDA Loan?

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Most borrowers know that if they put less than 20% down on a home, they are going to pay PMI. This pertains only to conventional loans though. You may know these loans as Fannie Mae or conforming loans. You pay the insurance on these loans until you owe less than 80% of the home’s value.

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USDA loans work differently. First of all, you don’t need a down payment. You can borrow up to 100% of the home’s value. Second, you don’t pay Private Mortgage Insurance. You do pay an annual fee, though. While it’s similar to the mortgage insurance, it’s much lower than PMI and you pay it for the life of the loan.

What is the USDA Annual Fee?

The USDA charges 0.35% of the loan balance on an annual basis. You pay the fee monthly, though. For example, if you borrow $100,000, your annual fee would be $350, but you would pay it in monthly increments of $29.

Let’s compare this to the PMI you would pay on a conventional loan. It’s impossible to know exactly how much you would pay in mortgage insurance because it’s based on your LTV and credit score, but in general, borrowers pay between 0.5% and 1% for this insurance. This means on a $100,000 loan, you’d pay between $500 to $1,000 per year for the insurance.

The Upfront Fee

The USDA also charges an upfront guarantee fee. This is how the USDA is able to guarantee the funds for ‘risky borrowers’. The fee recently came down. It now costs borrowers 1% of the loan amount at the closing. You are able to finance this fee with the loan, which means you might have an LTV slightly higher than 100%. This does not affect your chances of securing the loan, though.

The USDA charges the guarantee fee as a way to fund the ‘bail outs’ they need to pay certain lenders. As careful as the USDA is with their guidelines, there are still defaults that occur. When they do, the USDA pays the lender a portion of the funds (the amount they guaranteed). This helps the lender be able to write loans for less than perfect borrowers.

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The USDA Guidelines

It will all make sense when you see what the USDA requires. The requirements are much less stringent than the conventional guidelines starting with the 100% financing they offer. The USDA requires the following:

  • 640 credit score
  • Maximum housing ratio of 29%
  • Maximum total debt ratio of 41%
  • Stable income
  • Stable employment
  • No defaults on previous federal loans
  • You must live in the home as your owner-occupied property

One other factor that sets this loan apart is the eligibility for the program itself. Before you can even see if you qualify, you must prove that your total household income does not exceed 115% of the average income for the area. The USDA tallies the total household income whether or not everyone is on the loan. For example, if you have your parents living with you and they still work, their income will count towards eligibility. It does not count towards your qualifying income, though, unless they are on the loan.

The Conventional PMI Difference

So how is conventional loans PMI different? First, it’s insurance that covers the lender only. If you default on the loan, the insurance pays the lender back some of the money they lost. The lender requires this for any loans over 80% LTV. But, you can cancel the insurance.

By law, the lender must cancel it once you owe 78% of the original value of the home. But, you do have the option to request early cancellation if you know your home appreciated or if you paid the principal balance down faster than the loan required. If you know you owe less than 80% before the actual date your amortization table suggested you would be at this point, you can request cancellation of the insurance in writing. The lender will then determine if you do owe less than 80% by requiring an appraisal or by calculating your outstanding principal balance against the original value, if you paid extra money towards the principal.

The USDA does not charge PMI, which can be a great way for you to save money. Even though they do charge a guarantee fee, it’s much less than what you would pay for a conventional loan. You are only eligible for a USDA loan if you are not eligible for any other loan type, including the conventional loan. Either way, make sure you shop around and find the right USDA lender with the lowest fees and best interest rates.

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Homebuyers Continue to Benefit from Low USDA Guarantee Fees in 2018

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The USDA Rural Development is keeping its low upfront and annual guarantee fees for the next wave of homebuyers and refinancers. This is according to its Fiscal Year 2018 Conditional Commitment Notice in September.

From October 1, 2017 to September 30, 2018, USDA borrowers will pay an upfront guarantee fee of 1.0% and an annual guarantee fee of 0.35%. These USDA guarantee fees are applicable to purchase and refinance transactions obligated in FY 2018.

If you’re planning to take out a USDA guaranteed loan, knowing about guarantee fees is a good starting point. Learn more about USDA loans here.

A Tale of USDA Guarantee Fees

These two coexist to ensure that the guaranteed loan program remains subsidy neutral – the fees make up for the losses incurred by the program without resorting to taxpayer money.

Upfront Guarantee Fee

The USDA requires lenders to pay an upfront guarantee fee that should not exceed 3.5% of the original loan obligation. Since this cost is likely to be passed on the borrower, he/she has the option to finance it, partially finance it, or pay it in full.

This upfront guarantee fee can be paid using the borrower’s own funds, seller concessions, grant funds, gift funds or lender contributions at closing.

To be clear, the upfront fee is not refundable even if you were to refinance into a new guaranteed loan.

Annual Fee

Annual fees on USDA guaranteed loans must not exceed 0.5% of the average annual scheduled unpaid principal loan balance. The agency imposes this annual fee on the lender that will in turn pass this cost to the borrower.

It will be collected via the borrower’s monthly principal, interest, taxes, and insurance (PITI) payment on the mortgage. If the lender fails to settle this annual fee on time and incurs a late charge, this charge will not be passed on to the borrower.

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The annual fee is fixed at the time of closing; if you refinance into a new guaranteed loan, your annual fee could change.

More importantly, this annual fee will remain throughout the life of the loan. Exceptions are when you refinance into a new loan without an annual fee or into a new non-USDA loan.

Guarantee Fees Through the Years

The annual and upfront fee structure can change each fiscal year (October 1 through September 30) depending on the program.

USDA guarantee fees have been on a decline since the agency lowered its upfront guarantee to 2.75% and annual fee to 0.50% in FY 2016. They went even lower to 1% for upfront fees and 0.35% for annual fees in FY 2017.

Contrary to common belief, your annual and upfront fees will depend on the date the USDA issued a conditional commitment which reflects the applicable fee structure and not the date of the loan closing.

For example, your loan was issued a conditional commitment on August 15, 2016, when the fee structure was: 2.75% upfront and 0.50% annual but the loan closed on October 15, 2016 when a new fee structure of 1% upfront and 0.35% annual was made.

In the above scenario, the fee structure for FY 2016 will apply because the conditional commitment was issued within the FY 2016 timeframe.

Have more questions about guarantee fees and USDA loans in general? Talk with an expert today.

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How to Calculate USDA Mortgage Funding Fee

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How to Calculate USDA Mortgage Funding Fee

Buying a rural home with no down payment is possible with the USDA loan. Many people qualify for this loan and don’t realize it. If you could purchase a home just outside of the city limits with no down payment and low closing costs, would you? Most people would, they just don’t know how it works. Here we talk about the most misunderstood part of the USDA loan – the mortgage funding fee.

What is the USDA Mortgage Funding Fee?

The USDA is a government agency that provides these loans. However, they don’t fund them. They guarantee them for lenders. This makes it possible for lenders to provide loans to low to moderate-income families. These families don’t need excellent credit or even low debt ratios. What they need is low enough income to be eligible for the program. However, the income must cover their monthly obligations and leave plenty left over for daily living expenses. The USDA loan has much more liberal guidelines than many other loans. In order to provide these benefits, though, the USDA must charge a funding fee.

The fee the USDA charges helps them stay in business. They use the funds to stock their reserve account. This is the money they use to bail a lender out of a mortgage default. The USDA has the final say in which mortgage applications get approved, though. This way they can monitor and hopefully minimize the default lenders experience.

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How Much is the Funding Fee?

Right now, USDA borrowers have the good fortune of low fees. Recently the upfront fee decreased from 2.75% to just 1% of the loan amount. In order to calculate how much you owe, you must know your full loan amount. You can figure this out with the following:

  • Purchase price of the home
  • Amount of the down payment (if any)
  • Amount of the closing costs

Once you deduct any money you put down on the home from the purchase price and add in the closing costs, you have your loan amount.

Now, take the loan amount and multiply it by 1%. Here’s an example:

  • Purchase price $125,000
  • Down payment $0
  • Closing costs $1,500

The total loan amount equals $126,500. Take $126,500 x 1% and you get a funding fee of $1,265. You then have the choice to pay this amount at the closing or roll it into the loan amount.

If you pay it at the closing, be prepared to verify the assets you use to pay the fee. The lender must make sure they are your funds and that they are seasoned. This means that they sat in your account for at least 6 months, in most cases.

Paying the Annual Fee

The USDA loan requires more than just the funding fee, however. They also charge an annual fee. While the lender pays this fee on your behalf once a year, they charge you on a monthly basis. This helps make the fee more affordable. It also helps ensure that it is paid on time. In order to calculate this fee, you must know the amount of your outstanding balance each year. You can figure your original annual fee by taking the full loan amount and multiplying it by 0.35%, as this is the fee right now.

For example, if you took out a $100,000 loan, you would owe $350 per year or $29.16 per month. However, after the first 12 months, your outstanding principal balance should be slightly lower. The lender will take the average outstanding principal balance over the last 12 months. You can do this by looking at your amortization table and adding the last 12 months’ of outstanding balances. You then divide this number by 12. This gives you the average outstanding balance for the year. Let’s say in the beginning this amount equals $99.400. This might not seem low enough, but in the beginning, you pay very little principal and a lot more interest. As time goes on, you pay more principal than interest. On the $99,400, you would owe $28.99 per month. This number would then decrease each year.

Watch Your Debt Ratio

Keep in mind, your debt ratio is affected by the upfront funding fee and mortgage insurance fee. However, if you pay the upfront fee out of your own pocket, it doesn’t affect your debt ratio. The annual fee does, though. Because you owe this amount each month, it takes away from your gross monthly income. Luckily, the percentage is low enough that it usually does not affect debt ratios too much. The USDA does not put a lot of focus on debt ratios and they have flexible guidelines, so many borrowers are not affected by it.

Knowing how to calculate the funding fee and annual insurance fee can help you determine if the USDA loan is right for you. No matter which lender you choose, you will pay this fee. It is non-negotiable and is paid directly to the USDA. This is how they continue to be able to make loans for the low to moderate-income families.

Remember, you must qualify based on your household income. This means the income from every adult in your home. The amount cannot exceed 115% of the median income for your area. You can find this amount on the USDA’s website. You also must purchase a “rural” home. Again, this is determined by the USDA. It is worth looking at their map to see which areas are rural as they may surprise you. Oftentimes areas just outside of the suburbs qualify simply because of their low population rates. The eligible areas change with every census, so make sure you look at the most up-to-date information to see if the property you wish to purchase is eligible. The USDA program provides a very simple and inexpensive way to finance the home you want to own.

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How Much is the MIP for a USDA Streamline Loan?

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The government offers a variety of loans for borrowers who have limited income. Among those choices is the USDA loan. This program allows low income borrowers to secure 100% financing for a home located in a rural area. As an added benefit to the program, the USDA allows borrowers to use the USDA streamline loan to refinance. This allows borrowers to refinance with very little verification involved. Because the government agencies that oversee these loans, which in this case is the USDA, guarantee the loans rather than fund them, they must charge mortgage insurance premium. This helps to keep the agency in the business of guaranteeing loans for low income borrowers.

How Does the USDA Streamline Loan Work?

The USDA streamline loan allows current USDA borrowers to refinance their loan without the need to verify income, assets, credit, or the value of their home. There are just a few requirements you must meet. These include:

  • A lower payment – The idea behind the loan program is to help you afford your loan a little easier. The USDA requires the interest rate to be at least 1 percent lower than your current rate and for you to save at least $50 a month in order to use the program. This helps you to only refinance when there is a true benefit to your financial situation.
  • Suitable housing payment history – Your recent housing history lets the USDA know if you are serious about your mortgage payments. In the last 12 months, you cannot have more than one 30-day late payment. If you do, you must wait until a full 12 months passes again, where you do not have more than one late payment. This is in order to protect the USDA from default. If you have more than one late payment, you might be in the process of heading towards default and a new refinance would only put the USDA in a worse situation.
  • Owner occupied property – You must live in the property as well. The USDA program is strictly for low-income families to have a suitable place to live. You can provide your driver’s license, utility bills, tax returns, or property tax records with your address to verify your owner occupancy.

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How Much Mortgage Insurance Premium Will You Pay?

The mortgage insurance premium you will pay on a USDA Streamline Loan is the same as you paid with your original USDA loan. You will pay an upfront fee as well as a monthly mortgage insurance fee. The upfront fee equals 1% of your loan amount. If your loan equals $150,000, you will owe $1,500 for the funding fee. This fee is due at the closing; however, you can roll it into your loan amount without affecting the LTV.

The monthly mortgage insurance you will pay for the life of the loan equals 0.35% of the outstanding principal balance. The USDA bills this amount one time per year and sends it to your lender. The lender collects the amount from you monthly, though. This means they take the annual bill and divide it among the 12 months in the year. This helps to make the annual mortgage insurance premium more affordable for you. In the above example, your original annual MIP would equal $43.75 per month.

Why Does the USDA Charge MIP?

Just like the FHA program, the USDA program is self-funded. They rely on the premiums collected from current borrowers to offer the program to future borrowers. In order to continue to build up rural areas and provide very low-income families with a suitable place the live, the premiums will continue to be charged. The good news is that the premiums change from time to time. The amount the USDA charges is based on the amount of reserves they have. As soon as they reach a specific threshold where they can comfortably provide the program, they are able to lower the premiums for future borrowers. Oftentimes, this encourages current USDA borrowers to use the USDA Streamline program to lower their payment.

Can You Cancel USDA MIP?

The major difference between USDA MIP and conventional loan mortgage insurance is the ability to cancel the premiums. With USDA loans, you pay the premiums as long as you hold the loan. This means long after you have less than 80% borrowed compared to the value of your loan. The conventional loan, on the other hand, allows you to cancel your MIP as soon as you hit an 80% LTV. In fact, the law requires the lender to cancel the premium automatically once you hit 78% LTV. USDA premiums continue to be paid in order to keep the USDA funded.

The USDA Streamline Loan gives current USDA borrowers a great chance at refinancing. Despite the fact that you have to pay the funding fee again as well as continue to pay annual mortgage insurance premium, it is a great program. As long as you save money every month by lowering your interest rate at least one percent, you can start reaping the savings rather quickly after paying off the low funding fee. This allows you to start paying more principal to your loan, giving you quicker access to a home that you owe free and clear of any mortgage financing. If you want to refinance your USDA loan, make sure to shop around to find the best rates and closing costs available to you.

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Take Advantage of the New Low Fees With USDA Mortgage Loans

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If you thought to own a home with no money down and low-interest rates were impossible, you are in for a pleasant surprise. USDA mortgage loans, which always gave borrowers the option for no down payment, recently reduced their fees. Now with these new low fees, home ownership in a rural area is even easier!

The New Low Fees

The new low fees took effect October 1st. There are two fees that received a reduction: the upfront guarantee fee and the annual USDA fee that the USDA charges. The USDA charges each of these fees to the lender you use to write your loan and the lender turns around and charges you for them. In some cases, the lender can roll the upfront fee into the loan, but they add the annual fee to your monthly mortgage payment.

Previously these fees were:

  • 2.75% for the upfront guarantee fee
  • 0.5% for the annual USDA fee

The upfront guarantee fee never changes, however, the annual fee changes based on the average amount of unpaid principal balance.

Today these fees are:

  • 1.0% for the upfront guarantee fee
  • 0.35% for the annual USDA fee

How the New USDA Fees Affect You

Let’s take a look at a real-life example to see just how much money you stand to save with the new USDA fees.

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Let’s take a loan amount of $175,000.

The upfront guarantee fee based on the old figures equals $4,812.50. This means, if you roll the upfront guarantee fee into your loan, your new loan amount equals $179,812.50.

Today, the upfront guarantee fee on the $175,000 loan amount equals $1,750. This means, if you roll the upfront guarantee fee into your loan, your new loan amount equals $176,750. That is a $3,062.50 difference.

This has a direct impact on the amount of your principal and interest, helping you to have a lower mortgage payment over the life of the loan.

In addition, lower fees can positively impact the amount of money you have to purchase a home. With higher fees, your debt ratio increases, which directly impacts the amount of money you can borrow. With lower fees, your debt ratio decreases, and your eligibility for a higher principal amount can increase.

The Effective Dates

So far, the effective dates for the new low fees for the USDA loan are from October 1, 2016 through September 30, 2017. The USDA regularly analyzes the fees to ensure that the needs of the borrowers, as well as the USDA, are met. They will generally adjust the fees as necessary, whether increasing, decreasing, or leaving them stagnant for the following year.

Why the USDA Charges Fees

Many people wonder why a loan program that is supposed to cater to low-income families that want to purchase rural homes needs to charge such fees. The bottom line is that these fees are what helps the USDA help you. Without upfront and annual guarantee fees, the USDA does not have the reserves to guarantee loans. They need this money to bail out the banks that have borrowers that default.

The good news is that the USDA has one of the lowest default rates amongst the available loan types. This is why the USDA lowered the upfront and annual mortgage insurance fees that they normally charge for the next 12 months. Hopefully, the trend continues and the fees can either remain as low as they are or decrease even further.

The USDA program began to help build up rural areas that were often neglected. Today, the theme remains the same – the program desires to help borrowers obtain feasible housing options while continuing to build up the housing and commercial areas in rural towns. With the ability to put no money down, secure low-interest rates, and pay less for mortgage insurance, the USDA loan option provides ample opportunity for many different types of homeowners to own a home. There are many USDA lenders out there, especially with the new low fees offered, so make sure to shop around for the lender that offers you the most lucrative financing terms to help turn your dream of homeownership into reality.

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How does the Mortgage Insurance on USDA Loans Compare with FHA Loans

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How does the Mortgage Insurance on USDA Loans Compare with FHA Loans

USDA loans and FHA loans have a few things in common – they are both backed by a government agency and they both have lenient guidelines when it comes to qualifying for them. Where they differ, however, is in the amount of mortgage insurance you have to pay for in order to have the loan. Both loans require an upfront fee which you can pay at the closing or wrap into your loan amount as well as annual mortgage insurance, which you pay monthly in your regular payments, but the amounts differ.

FHA Mortgage Insurance

FHA loans are backed by the FHA. They have flexible qualifying guidelines and do not require very high credit scores. Because of that, the agency requires upfront mortgage insurance to fund the reserve account that they hold in order to make good on the claims that lenders have to make in order to get paid on the loans that their borrowers default on. The reserves are funded with the 1.75% of the loan amount that each borrower pays. On a $200,000 loan, you would pay $3,500 at the closing or wrap it into your loan amount if you are eligible to do so.

The FHA also charges annual mortgage insurance to further the reserve funds of their account. This money, however, gets paid monthly and is equal to 0.85% of the outstanding loan amount. On the $200,000 loan, this amount would equal $141.67 per month, but would change each year as the amount of the outstanding principal decreases.

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USDA Mortgage Insurance

USDA loans are backed by the USDA and have similarly flexible guidelines. These loans were created for low and very low income families in an effort to help them become homeowners. This program also requires upfront and annual mortgage insurance. The upfront mortgage insurance funds the USDA’s reserve account, much the same as the FHA’s upfront mortgage insurance does. The amount you pay on a USDA loan is 2.75% of the original loan amount. Typically, most borrowers roll this cost into their loan, which the USDA automatically does for you in an effort to make the loan more affordable. On a $150,000 loan, the amount that would be required upfront equals $2,625.

The USDA charges mortgage insurance on an annual basis as well. This money helps to fund the reserve account and is equal to 0.5% of the outstanding loan amount. In the start of a $150,000 loan, the amount would equal $62.50 per month, but would change yearly as the amount of the outstanding principal decreased.

What’s the Difference?

Let’s take a look at a $125,000 loan for both the USDA and the FHA loans to see which would cost you less in the end:

  • FHA Loan – The mortgage insurance on this loan would equal $2,187.50 (the upfront mortgage insurance) plus $88.54 per month for annual mortgage insurance. For the first year, the total amount you would pay would be $3,249.50.
  • USDA Loan – The mortgage insurance on this loan would equal $3,437.50 (upfront mortgage insurance) plus $52.08 per month for annual mortgage insurance. For the first year, the total amount you would pay would be $$4,062.50.

The loan you qualify for should dictate which program you use. As you can see, the FHA loan is the more affordable option as far as mortgage insurance; however, not everyone will qualify for this program. If you are a low or very low income family, qualifying even for an FHA loan might prove to be a hardship, which is why the USDA loan is a great option for these families. If you purchase a home in a rural area, you are eligible for this program. Shop around with various lenders to see how much you can get your closing costs down and then enjoy the benefits of either of these government-backed loans.

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