Do USDA Loans Have Mortgage Insurance?

USDA loans offer a variety of attractive features, such as zero required down payment and flexible credit eligibility. You may also have heard that USDA loans do not require mortgage insurance payments. While true – there is technically no USDA mortgage insurance requirement – the program does have a couple of other fees that serve a similar purpose.

Key Takeaways

• USDA loans do not require mortgage insurance, but they do have upfront and annual guarantee fees.

• The USDA upfront guarantee fee equals 1% of the amount borrowed and can typically be included in the mortgage balance.

• The USDA annual guarantee fee equals 0.35% of the loan balance divided evenly among the borrower’s monthly payments.

• Even accounting for guarantee fees, USDA loans often offer lower payments with cheaper costs than other types of mortgages.

Do USDA Loans Require Mortgage Insurance?

The US Department of Agriculture does not require USDA loan borrowers to pay mortgage insurance, most commonly associated with conventional and FHA-backed loans. However, the USDA does charge two types of guarantee fees with its mortgages.

USDA Guarantee Fees

All USDA loans have two different guarantee fees:

· An upfront guarantee fee of 1% of the amount borrowed

· An ongoing annual guarantee fee of 0.35% of the loan balance

These two guarantee fees are not technically mortgage insurance, but they help ensure the stability and long-term viability of the USDA's Rural Development loan program.

USDA Upfront Guarantee Fee

The USDA upfront guarantee fee is assessed on all new loans for 1% of the total amount borrowed.

Here’s an idea of what you could expect to owe as an upfront guarantee fee based on the price of the purchased home:

Borrowers can typically pay the upfront guarantee fee at closing or wrap it into their new mortgage balance.

Keep in mind that rolling the USDA upfront fee into your loan results in paying slightly more in interest and monthly payments due to the higher principal balance.

USDA Annual Guarantee Fee

In addition to the one-time upfront fee, borrowers must also pay an ongoing USDA annual guarantee of 0.35% of their loan balance. This fee is calculated annually and divided evenly across their monthly payments.

For example, if you have a loan balance of $200,000, your total annual guarantee fee would be $700, equating to just under $60 per month when divided among 12 payments.

Since your USDA annual guarantee fee is recalculated yearly, your ongoing costs will decrease as you reduce your loan balance.

Here’s an idea of how much you could expect to pay each month toward the USDA annual fee based on your outstanding loan amount:

How USDA Guarantee Fees Compare to Other Types of Loans

We've covered what to expect regarding guarantee fees – which effectively serve as USDA mortgage insurance – but how do they compare to the costs and insurance premiums attached to other kinds of loans?

Conventional Mortgage Insurance & Fees

Although conventional loans have no upfront guarantee fee, lenders require all borrowers with less than 20% equity to pay private mortgage insurance (PMI).

Rather than charge a flat rate, conventional mortgage insurance is risk-based, meaning that riskier borrowers with lower credit scores pay a higher percentage than those with excellent credit.

Here’s an idea of what a conventional buyer putting 5% down would pay in PMI on a 30-year $250,000 loan according to rates from insurance giant MGIC:

As you can see from the chart, borrowers with lower credit scores could pay hundreds more per month with conventional PMI compared to the USDA annual guarantee fee. Even with excellent credit and a 5% down payment, a conventional borrower qualifying for a 0.38% PMI rate would pay more than a 0% down USDA borrower with the 0.35% annual fee.

FHA Mortgage Insurance & Fees

The Federal Housing Administration charges two types of mortgage insurance on its loans: an upfront mortgage insurance premium (UFMIP) and an ongoing annual mortgage insurance premium (MIP).

The upfront mortgage insurance premium for all FHA loans is 1.75% of the amount borrowed, so borrowers pay nearly twice as much upfront as for a USDA loan.

FHA-backed loans also come with an ongoing mortgage insurance premium that typically persists for the life of the loan, much like the USDA annual guarantee fee. The FHA MIP rate varies based on the down payment as well as the size and length of the loan, but most FHA borrowers pay an ongoing annual rate of 0.55%.

Here’s an idea of how the FHA mortgage insurance premium could compare to the USDA annual guarantee fee based on varying loan balances:

VA Mortgage Insurance & Fees

VA loans do not have an ongoing fee or mortgage insurance requirement. However, they do charge an upfront funding fee, which is larger than the USDA upfront guarantee for most eligible borrowers.

The VA funding fee for a purchase loan is based on the down payment percentage (if any) and whether the borrower has previously obtained a VA-backed loan. Funding fee rates for first-time borrowers range from 1.25% to 2.15%, while repeat borrowers pay between 1.25% and 3.3%.

Assuming no down payment, here’s what the VA funding fee could look like compared to the USDA upfront guarantee:

Without making a down payment, the VA funding fee is far larger than the USDA upfront fee in nearly all cases. However, VA-eligible borrowers who qualify for service-related disability may be able to waive their funding fee.

USDA Guarantee Fees and Refinances

All USDA-backed loans have guarantee fees, including USDA refinances. While the FHA allows borrowers to receive a UFMIP refund when refinancing within the first three years after obtaining a loan, the USDA has no such provision.

That means refinancing into another USDA mortgage – including through the USDA streamline refinance program – results in paying another 1% upfront guarantee fee. You also remain responsible for the ongoing annual fee regardless of how much equity you have in your home.

One thing to remember is that USDA mortgage holders are not limited to USDA refinance options. For homeowners who have built up at least 20% equity.

Conventional lenders do not have an upfront guarantee fee and do not require ongoing private mortgage insurance for borrowers with 20% equity or more.

However, conventional interest rates can be higher for applicants with lower credit scores, so be sure to compare overall loan costs side-by-side when deciding what's best for you.

USDA Mortgage Insurance Frequently Asked Questions

Still wondering how USDA loan mortgage insurance requirements work and how much you might have to pay? Here are answers to more questions about the upfront guarantee fee and USDA monthly mortgage insurance costs.

Does USDA Offer Mortgage Protection Insurance?

While conventional loans require private mortgage insurance, the USDA offers a different type of mortgage protection insurance. Instead of borrowers paying PMI rates based on their credit score, all USDA loans come with an upfront guarantee fee of 1% and an ongoing annual fee of 0.35%.

Does Mortgage Insurance Go Away on a USDA Loan?

No, all USDA loans have an ongoing annual guarantee fee of 0.35%, which persists for the duration of the loan. Unlike conventional mortgages, borrowers must continue to pay the USDA fee even if they have more than 20% equity. Homeowners with enough equity can do a conventional refinance to eliminate mortgage insurance costs.

Does USDA Have PMI or MIP?

Neither! Private mortgage insurance (PMI) is associated with conventional loans, while FHA-backed mortgages charge a mortgage insurance premium (MIP). USDA loans do, however, have guarantee fees that serve a similar purpose. All USDA loans have an upfront cost of 1% and an annual guarantee fee of 0.35%.

USDA Guarantee Fees: Not As Scary As They Sound

Although the USDA guarantee fees may sound imposing initially, they tend to be far lower and more affordable than the fees and mortgage insurance costs associated with other types of loans.

For many buyers, particularly those with lower credit and little-to-no down payment, USDA-backed mortgages offer cheaper monthly payments and more lenient qualifying requirements than most alternatives.

To discover if you're eligible for a USDA loan as well as any other mortgage options, take a look at today's interest rates and apply with a reputable lender serving your community.