The USDA Guarantee Fee and Annual Fee are critical components of the USDA loan program, designed to make home buying more accessible, particularly for low- to moderate-income homebuyers in rural and suburban areas. These fees are unique to USDA loans and play a crucial role in the program’s functionality.

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Understanding the USDA Guarantee Fee

The USDA Guarantee Fee is a one-time fee applied to USDA loans. It’s designed to enable the USDA to offer these mortgages by functioning as a form of mortgage insurance. For the fiscal year 2023, this fee is set at 1% of the loan amount. It can be paid upfront at closing or rolled into the total loan amount. For example, if you take a loan of $200,000, the guarantee fee would be $2,000, making the total loan amount $202,000. This fee helps ensure the loan program remains subsidy neutral, meaning it doesn’t rely on taxpayer funds to cover program losses.

The Annual USDA Loan Fee

Besides the upfront guarantee fee, there is also an Annual Fee associated with USDA loans. As of 2023, this fee is 0.35% of the loan amount, divided into 12 monthly installments included in the mortgage payments. This fee is recalculated each year based on the remaining loan balance. So, for a loan balance of $200,000, the annual fee would add approximately $58.33 per month to the mortgage payment.

How These Fees Benefit Borrowers

While the concept of paying additional fees might initially seem like a burden, these fees enable borrowers to benefit from the USDA loan’s unique features, like zero down payment and lower interest rates compared to conventional loans. The upfront fee can be financed into the loan, and the annual fee is a relatively small amount that’s spread out over each monthly payment.

Comparison with Other Loan Types

When compared to FHA and conventional loans, the USDA’s guarantee and annual fees are generally lower. FHA loans, for instance, require an upfront mortgage insurance premium (MIP) of 1.75% and an ongoing annual MIP of up to 0.85%, depending on the loan amount and term. Conventional loans may require private mortgage insurance (PMI) if the down payment is less than 20%, which can be removed once the loan balance falls to 80% of the home’s value. However, USDA loans do not offer the option to cancel the annual fee without refinancing.

Conclusion

The USDA Guarantee Fee and Annual Fee are vital for maintaining the sustainability of the USDA loan program, making homeownership more attainable for those in eligible rural and suburban areas. While they add to the cost of the loan, the benefits they enable, like zero down payment and lower interest rates, often outweigh these additional charges.

Sources

For more detailed information on USDA loans and their associated fees, you can reach out to one of our Smart Mortgage experts. Our professionals offer comprehensive insights and examples to help understand how these fees impact USDA loans.

Are you ready for a USDA home loan? Call Now (888)416-4805 or Apply Now Online.