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.
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.