USDA Funding Fee: What Is It and How Much Will It Cost?

Borrowers who take out a home loan insured by the United States Department of Agriculture (USDA) are responsible for paying a USDA funding fee. What exactly is this fee used for, and how much will it cost you?

What Is the USDA Funding Fee?

The USDA funding fee is a charge assessed on all USDA-backed loans that helps to ensure the long-term viability of the USDA's Single Family Housing loan program.

This fee allows the US Department of Agriculture to provide lenders with backing on mortgages funded through the agency's Rural Development program. If a borrower stops making their payments, the USDA guarantees to reimburse the lender up to 90% of the original loan amount. As such, the USDA funding fee is often referred to as a guarantee fee.

Because of this strong government backing, USDA lenders can offer zero-down financing with competitive interest rates to borrowers who may not be able to qualify for other types of mortgages.

“The fee serves as a vital risk-sharing mechanism, fostering a symbiotic relationship between lenders and the USDA, ultimately reinforcing the program's resilience and longevity,” says Scott Bialek, co-founder of Hurst Lending.

While the USDA funding fee is not mortgage insurance, it serves the same purpose. For most borrowers, however, the cost will be far less than the private mortgage insurance (PMI) required for low-down-payment conventional loans or the mortgage insurance premium (MIP) attached to FHA loans.

How Much Is the USDA Funding Fee?

The USDA funding fee can be broken down into two separate costs: the one-time upfront funding fee and the ongoing annual funding fee.

Upfront Funding Fee

The USDA upfront funding fee is currently set at 1% of your total loan amount. This figure has been in place since October 2016, when the cost was lowered from 2.75%. The upfront funding fee is reviewed periodically to ensure it meets the needs of the Single Family Housing loan program. However, the Housing Act of 1949 establishes a maximum limit of 3.5%.

Here’s an idea of how much you would pay toward the USDA upfront funding fee at the present rate of 1% based on various loan amounts:

Annual Funding Fee

The USDA annual funding fee is presently set at 0.35% of your loan balance. That amounts to about $28 per month per $100,000 borrowed.

Like the upfront funding fee, this current rate has been in place since October 2016, when it was lowered from 0.5%, the maximum amount allowed under federal law.

Your annual funding fee is reassessed each year based on your loan balance as of December 31st. Your initial annual fee will be calculated on your total amount borrowed, with costs dropping over time as you pay down your mortgage.

Don't worry, though – you aren't required to pay your entire USDA annual funding fee all at once. Instead, the cost is divided evenly across the 12 monthly payments you'll make that year.

For Example: Your loan balance at the time of reassessment is $240,000. This equates to an annual funding fee of $840. Spread across your payments, you'll be responsible for a total ongoing cost of $70 each month.

Here's how much you could expect to pay toward the USDA annual funding fee, both in total and monthly, based on various loan balances:

How to Pay the USDA Upfront Funding Fee

Do you have to pay the USDA upfront funding fee all at once at closing? No, you do not. In fact, most borrowers do not actually pay the upfront funding fee upfront. Here are your different options for covering this 1% cost.

Finance It Into Your Loan

The majority of borrowers choose to finance their upfront funding fee as part of their mortgage. USDA lending guidelines explicitly allow this cost to be wrapped in, even when it causes your total loan to be more than the appraised value of your home.

Keep in mind, however, that the funding fee is based on your total loan amount. If you are financing the 1% fee into your loan, the true cost ends up being around 1.0101% since you will wind up paying a small fee on the fee.

Pay It at Closing

While you do not have to pay your USDA funding fee at closing, doing so can save you money in the long run. Not only does financing it make the funding fee marginally higher, it also means that you'll be paying extra interest on that additional amount. If you have the funds available, you can pay your fee alongside your USDA closing costs.

Use Seller Concessions

Sometimes, home buyers negotiate seller concessions as part of their purchase agreement. These are funds that the seller (or other interested parties to the transaction) agree to pay to help cover your closing costs and related expenses, such as your upfront funding fee.

For example, you might make an offer on a home for $250,000 with the stipulation that the seller pays $5,000 toward your closing expenses. Assuming the property appraises for your agreed-upon price, you can take out a USDA loan for the full amount while reducing your out-of-pocket costs at closing.

USDA lending guidelines allow borrowers to receive up to 6% of their purchase price back as seller concessions.

Apply for Down Payment Assistance

USDA borrowers don’t typically think about applying for down payment assistance (DPA) because the program offers 0%-down financing on all of its residential loans. However, many DPA programs can be used with USDA financing.

While you can use these down payment assistance funds to reduce the total amount you need to borrow – essentially making a down payment on your home – you can also use them to cover closing costs, including your funding fee, in most situations.

Can You Avoid the USDA Funding Fee?

Borrowers often wonder if it’s possible to avoid the USDA funding fee. Currently, the USDA does not offer any type of funding fee waivers or exceptions. All borrowers are required to pay the 1% upfront funding fee, as well as the 0.35% annual funding fee for the life of their loan.

How Long Does the USDA Annual Funding Fee Last?

Unlike conventional PMI, which can be canceled once you reach 20% equity, the USDA annual funding fee persists for the life of your mortgage. If you keep your USDA loan for its entire 30-year term, you will pay toward the USDA funding fee every single month.

If you refinance your loan into another USDA-backed mortgage, you’ll continue to pay the funding fee for the life of that loan as well.

However, many USDA borrowers choose to refinance into a conventional mortgage once their loan reaches 80% of their home’s appraised value. This eliminates the need for any type of ongoing mortgage insurance. Conventional loans also do not have an upfront fee, which means avoiding the 1% funding fee you’d pay if you refinanced with the USDA.

Can You Buy Out the USDA Annual Funding Fee at Closing?

With a conventional mortgage, it's often possible to make a lump sum payment at closing to eliminate the need for ongoing PMI. But the USDA does not allow borrowers to buy out their ongoing fee.

Is the USDA Funding Fee Worth It?

It's not uncommon for prospective borrowers to wonder if the USDA funding fee is actually worth it or if they would be better off with a different type of loan. In most cases, however, applicants who would qualify for a USDA-backed mortgage find themselves better off paying the funding fee compared to the costs of other mortgage options.

Here’s a chart showing the funding fees associated with different loan types on a 30-year fixed-rate mortgage when making each program’s minimum required down payment:

*private mortgage insurance rates according to PMI provider MGIC

USDA Funding Fee vs FHA Funding Fee

The FHA charges an upfront funding fee – referred to as an upfront mortgage insurance premium (UFMIP) – equal to 1.75% of your total loan balance. This is 0.75% higher than the USDA funding fee.

In addition, borrowers will make ongoing MIP payments at a rate ranging from 0.15% to 0.75% on all FHA loans. Your actual monthly MIP costs will depend on your down payment, loan size, and the length of your mortgage.

Most buyers, however, will end up paying an annual FHA funding fee of 0.55% for the life of their loan compared to the 0.35% currently charged by the USDA.

USDA Funding Fee vs VA Funding Fee

There is no ongoing annual fee with a VA loan, but most borrowers will pay a far larger upfront funding fee. Homebuyers putting less than 5% down will incur a VA funding fee of either 2.15% or 3.3%, depending on whether they've previously used their VA benefits to buy or refinance a property.

Keep in mind, however, that eligible borrowers with a service-related disability may be able to have their VA funding fee waived, which can make this loan type a better choice in most cases.

USDA Funding Fee vs Conventional Funding Fee

Conventional loans do not have an upfront fee. Still, buyers without excellent credit and a sizeable down payment will likely pay higher annual fees. This is because conventional lenders require private mortgage insurance on purchases with less than 20% down.

PMI is risk-based and varies greatly depending on your credit score, down payment, interest rate structure, and repayment term. Unlike USDA fees, however, conventional PMI is cancellable once you establish 20% equity in your home.

The USDA Funding Fee Is a Small Price to Pay

Despite having an upfront funding fee of 1% and an annual funding fee of 0.35%, USDA loans are one of the best options out there for purchasing rural properties. Not only can you buy with no money down, but thanks to the agency's mortgage backing, lenders can typically qualify borrowers for interest rates lower than conventional financing.

To find out if you meet the guidelines for a USDA loan, as well as a personalized estimate of how much of a USDA funding fee you should expect to pay, get in touch with a USDA-approved lender today.