The USDA loan is unique because it provides you with 100% funding. You don’t need any money down on the home. It may sound too good to be true, but it gets better. You can also roll the upfront PMI fee into the loan on top of the 100% LTV. In reality, you could owe 101% of the home’s value when you first buy the home.
What is the USDA Upfront PMI Fee?
The USDA Upfront PMI is a guarantee fee. In short, it helps fund the USDA. They are a self-funded program. They also guarantee every loan they approve. If a USDA borrower defaults on their loan, the USDA pays the bank back. The bank might not get 100% of the amount they lost back, but they’ll get a high percentage of it. This is why lenders don’t mind writing risky loans. The USDA guidelines are rather loose when it comes to guidelines. Some lenders do add their own requirements on top of the USDA’s requirements, though.
Right now, the USDA upfront fee equals 1% of the loan amount. On a $100,000 loan, you’d owe $1,000. It’s significantly lower than other programs, like the FHA loan. Right now, FHA loans charge 1.75%. This means $1,750 at the onset of the loan.
If you decide to roll the upfront fee into your loan, remember that you’ll pay interest on those fees. You stretch the payment out for 30 years. This means a lot of interest on that $1,000. But, if you don’t have the cash up front, it can be your only choice.
What is the Annual Fee?
The USDA also charges an annual fee. It’s more like a monthly fee, though. The insurance company charges the lender on an annual basis. They base your fee on the average outstanding balance for the year. The lender pays the fee at the time of billing. The lender then charges you 1/12th of that amount every month. You can expect the annual mortgage insurance fee to decrease slightly each year as long as you make your monthly payments on time.
Right now, the USDA charges 0.35% of your average mortgage balance. Initially, on a $100,000 loan, you’d pay $350 per year or $29 per month. Again, the lender adds it to your mortgage payment. You don’t pay the full amount up front.
Paying Other USDA Closing Costs
The USDA loan involves other closing costs as well. You can expect between $5,000 and $10,000 on average. What if you don’t have the money? You have options:
- Ask for gift funds from family members – Family and non-family members may be able to provide you with the funds to close. They must provide a Gift Letter letting the lender know it’s a gift. The lender needs to know beyond a reasonable doubt that you are not taking on another loan. This would affect your debt ratio and possibly your loan approval.
- Roll the costs into the loan – If you have room between the sales price and the appraised value, you can include the closing costs in your loan. The only amount you can go over 100% of the appraised value is the funding fee. Everything else must fall below the appraised value. If there’s room, though, you can take advantage of it.
- Negotiate a higher price with the seller – Again, if the value is there, you can work with the seller. Offer a higher contracted sales price in exchange for a seller credit. At the closing, the seller then pays your closing costs. The seller still walks away with the same sales price in the end.
- Negotiate a no closing cost loan – Your lender may offer a no closing cost loan as well. This usually means you must take a higher interest rate. If you qualify for the higher rate, you won’t have to bring any money to the closing. The lender covers the closing costs for you.
The USDA loan is one of the few loans that provides so many options when it comes to closing costs. The USDA upfront PMI has the most lenient rules. Being able to automatically include it in your loan amount is very rare. This lowers the amount of cash you need at the closing. It can affect your debt ratio, though. If you are already close without rolling the funding fee into the loan, you may need to work with your other options. Make sure you talk with several lenders to explore all of your options. This way you can find a way to make the USDA loan work for you.