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 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.