Every loan has fees, but some have more than others. In general, the loans that offer a guarantee in the event that you default on the loan cost the most in the long run. The same is even true for conventional loans; if you put down less than 20 percent of the purchase price, you will need to pay a mortgage insurance premium, which guarantees the loan if you default, making lenders more willing to lend to you. Basically you can think of these fees as a way to get you into a loan that you would otherwise be ineligible to obtain if you did not have a way to “guarantee” it in the face of default. The USDA guarantee fee is structured a little differently than the other loans available on the market. It is not hard to understand, it just takes a little calculating to figure it out.
The Upfront USDA Guarantee Fee
The USDA has two fees that it charges. The upfront USDA guarantee fee is just as the name suggests; it is due upfront when you close on the loan. Now, there is a small difference in this upfront fee and that of the FHA loan. The FHA loan upfront fee needs to be paid with the closing costs and it cannot be rolled into the loan amount in most cases. The only exception to that rule is if you have room in the loan-to-value ratio. If your loan does not exceed a 96.5 percent LTV, then you can roll a portion of the closing costs into the loan until you hit the maximum 96.5 percent. In most cases, the people taking the FHA loan do so because they do not have any more than the 3.5 percent to put down so there is no room to roll the closing costs into the loan. The USDA loan, on the other hand, will increase the amount of the loan the exact amount of the upfront guarantee fee allowing you to roll the entire fee into the loan.
The upfront fee for the USDA loan is 2 percent. This is figure based on the sales price of the home. If you are purchasing a $200,000 home, the upfront fee would be $4,000. If you are not putting any money down on the purchase of the home – taking the USDA loan at its full benefit, then you would have a loan amount of $204,000 with the upfront fee rolled into it. You would then pay the fee off as you paid your mortgage down.
The Annual USDA Guarantee Fee
In addition to the upfront fee is the annual USDA guarantee fee that is charged. This fee is lower than the 2 percent upfront fee, but totals out to a lot more money over the life of the loan. In 2015, the annual guarantee fee is .5 percent of the loan amount. For the same $200,000 loan with the $4,000 upfront guarantee fee rolled in, the annual fee would be $1020. This amount is then divided up over a period of 12 months and is added to your mortgage payment, similar to the way that an escrow payment would be added. So for the $204,000 loan, there would be an addition $85 per month on the mortgage payment.
As you try to determine which loan is right for you, take into consideration the amount of money you will pay over the life of the loan with $85 per month added to every payment. This fee is never waived, unlike the FHA or conventional loan that can have the PMI removed once the home hits between a 78 and 80 percent LTV, depending on the type of loan. $85 per month over a 30-year period equals $30,600 to cover the annual USDA guarantee fee.
The fees charged by the USDA in order to be able to guarantee loans are a good thing for borrowers that would otherwise be unable to secure a loan. The fees keep the USDA operating and able to provide mortgages to low income borrowers, which helps to keep low income areas from becoming run down. The USDA guarantee fee might seem expensive or inconvenient to pay both up front and every month for 30 years, but if it helps you to get a mortgage, it might not seem as obtrusive. If you are comparing several types of loans, such as an FHA loan or conventional loan with PMI, assuming you qualify for these types of loans, make sure to figure the amount of the insurance fees that you will pay. The FHA and conventional loans might have higher fees than you would pay on the USDA loans. This will enable you to compare “apples to apples” and get the loan that will be most affordable for you.