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USDA Loan Rates, Lenders, Guidelines and Information

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 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.

Got more questions on mortgage insurances? Let a lender walk you through»

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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