USDA Loan

  • Home
  • USDA Housing Loan Benefits
  • USDA Loan Information
    • Guaranteed USDA Rural Home Loan And USDA Direct Loan
    • USDA Loan Credit Requirements
    • USDA Loan Eligibility
    • USDA Loan Property Eligibility
  • USDA Loan Quote
  • USDA Loan State Information
    • Arizona USDA Loans
    • California USDA Loans
    • Ohio USDA Loans
  • Blog

The Difference Between the USDA Annual Fee and PMI

December 30, 2021 By JMcHood

If you put less than 20% down on a conventional loan, you pay for Private Mortgage Insurance. The PMI protects the lender should you default on your loan. It makes sense that USDA loans would have mortgage insurance too, right? After all, you can borrow 100% of the home’s value. The USDA doesn’t charge Private Mortgage Insurance, though. Instead, they charge an annual fee.

Get Matched with a Lender, Click Here.

Keep reading to learn the difference.

Conventional Loan PMI

Private Mortgage Insurance on conventional loans costs between 0.5% to 1% of the loan amount. The amount you pay depends on your credit score and down payment. The lower your credit score and down payment, the more PMI you’ll pay. The amount you pay is based on your ‘riskiness.’ A low credit score means you have a higher risk of defaulting on the loan. Making a lower down payment also puts you at risk of default. The more ‘skin in the game’ that you have, the less likely you are to default.

The USDA Annual Fee

The USDA charges what’s called an annual fee. Right now, the annual fee is 0.35% of the loan amount. While the amount is calculated annually, you pay it off monthly. For example, if you borrow $150,000, you’d owe $525 per year or $43.75 per month. You pay the monthly fee with your mortgage payment every month.

How Long Does PMI and the USDA Annual Fee Last?

In addition to the percentage difference, PMI and the USDA annual fee have differing terms too. You pay PMI only if you borrow more than 80% of the home’s value. You continue to pay it as long as you owe more than 80% of the home’s original value. Once you pay the principal balance down enough to have at least 20% equity in the home, you can request that the lender cancel the PMI. In fact, by law, the lender must automatically cancel the insurance once you owe less than 78% of the home’s original value.

The USDA annual fee lasts for the life of the loan. There isn’t an option to cancel it. As long as you have an outstanding mortgage balance, you pay the annual fee for that balance. The amount you pay may decrease slightly every year, as you pay the principal balance down, but you’ll never have a USDA mortgage payment without the annual fee payment.

The Other USDA Fee

You’ll also pay an upfront guarantee fee on a USDA loan. The USDA uses these funds to continue guaranteeing loans for borrowers. Since the USDA is self-funded, they rely on the payments. With the guarantee from the USDA, lenders are able to give loans to borrowers that would otherwise be ineligible to get a loan. The USDA loan is often the ‘last resort’ loan.

Right now, the USDA fee is 1% of the loan amount. On the $150,000 loan, you’d owe $1,500 at the closing. If you can’t afford to pay it at the closing, you can wrap the fee into your loan. You can do this even if you borrow 100% of the sales price.

Click to See the Latest Mortgage Rates.

Qualifying for a USDA Loan

Qualifying for a USDA loan is a little more flexible than a conventional loan too. Conventional loans typically require higher credit scores and lower debt ratios. That’s how conventional lenders get away with canceling your PMI once you owe less than 80% of the home’s value. USDA loans require:

  • 640 credit score
  • 29% housing ratio
  • 41% total debt ratio
  • Stable income and employment for the last 2 years
  • No defaulted federal payments
  • Proof that you’ll occupy the home as your primary residence

You must be eligible for the USDA loan program too. This means:

  • Your household income doesn’t exceed the limits for your area
  • You don’t qualify for any other type of financing including conventional and FHA loans
  • You will buy a home in a rural area as designated by the USDA

The USDA annual fee is similar to PMI, but only in that it helps the USDA guarantee the loan for lenders. PMI can be more expensive, but can be canceled. The two loans are mutually exclusive, though. If you qualify for a conventional loan, you won’t qualify for a USDA loan.

Click Here to Get Matched With a Lender.

Filed Under: USDA Closing Costs, USDA Guidelines

Latest News

  • Are there Government Home Loans for Rural Areas?
  • How Many USDA Loans Can One Person Have?
  • How You Can Use USDA Home Loan Eligibility Twice

Search

IMPORTANT MORTGAGE DISCLOSURES:

When inquiring about a mortgage on this site, this is not a mortgage application. Upon the completion of your inquiry, we will work hard to match you with a lender who may assist you with a mortgage application and provide mortgage product eligibility requirements for your individual situation.

Any mortgage product that a lender may offer you will carry fees or costs including closing costs, origination points, and/or refinancing fees. In many instances, fees or costs can amount to several thousand dollars and can be due upon the origination of the mortgage credit product.

When applying for a mortgage credit product, lenders will commonly require you to provide a valid social security number and submit to a credit check . Consumers who do not have the minimum acceptable credit required by the lender are unlikely to be approved for mortgage refinancing.

Minimum credit ratings may vary according to lender and mortgage product. In the event that you do not qualify for a credit rating based on the required minimum credit rating, a lender may or may not introduce you to a credit counseling service or credit improvement company who may or may not be able to assist you with improving your credit for a fee.

Copyright © Mortgage.info is not a government agency or a lender. Not affiliated with HUD, FHA, VA, FNMA or GNMA. We work hard to match you with local lenders for the mortgage you inquire about. This is not an offer to lend and we are not affiliated with your current mortgage servicer.

Contact Us | Terms of Use | Privacy Policy | Media | DMCA Policy | Anti-spam Policy | Unsubscribe

Mortgage.info

NMLS ID #1237615 | AZMB #0928735

8123 South Interport Blvd. Suite A, Englewood, CO 80112

CLICK TO SEE TODAY'S RATES