Do USDA loans have PMI? If you’re considering a USDA loan, you’re probably curious about this important detail. While USDA loans offer many advantages, understanding the costs is crucial before making a decision. In this post, we’ll explore how USDA loans differ from other loan types, including the fees you’ll encounter. We’ll also break down the USDA guarantee fee and why it’s not the same as PMI. Let’s dive in!
What Are The Advantages Of USDA Loans For Eligible Borrowers?
Overview Of USDA Loans
USDA loans, backed by the U.S. Department of Agriculture, are designed to help low-to-moderate-income individuals or families purchase homes in rural or suburban areas. Learn more
What Is Private Mortgage Insurance (PMI)?
Private Mortgage Insurance is a policy that protects the lender in case the borrower defaults on the loan. Typically, if a borrower is unable to put down at least 20% of the home’s value, PMI is required. It’s usually added to your monthly mortgage payment, increasing your overall cost of homeownership.
For conventional loans, PMI rates vary, but they often range from 0.3% to 1.5% of the original loan amount annually. The precise rate is contingent upon variables such as credit score, your down payment, and loan amount. PMI can be removed once you have more than 20% equity in your home, but until then, it’s an ongoing cost.
So,
Do USDA Loans Have PMI?
The short answer is no, but that doesn’t mean there are no fees associated with it. Here’s the good news: USDA loans don’t require PMI. This is a major advantage for borrowers who qualify. However, instead of PMI, USDA loans come with something called a guarantee fee. While it’s not the same as PMI, it’s often confused with it due to its similar purpose—protecting the lender.
The USDA guarantee fee is typically lower than PMI, which helps to make USDA loans a more affordable option for many buyers. But, just like PMI, it still impacts your overall loan costs. Let us examine the mechanics of these fees in further detail.
What Fees Are Involved In USDA Loans?
While you won’t have to pay PMI, USDA loans come with two main types of fees: the upfront guarantee fee and the annual guarantee fee.
Upfront Guarantee Fee:
This fee is paid at the time of the loan closing. It’s typically 1% of the loan amount. While it’s not technically a down payment, it can be rolled into the loan itself, so you don’t have to pay it out of pocket upfront. This helps to keep initial costs lower, though it does increase your loan balance.
Annual Guarantee Fees:
This recurring cost is paid annually and is often 0.35% of the loan principal. It’s added to your monthly mortgage payments, so it’s spread out over the life of the loan. This is similar to PMI in the sense that it’s part of your ongoing monthly mortgage costs, but it’s generally less expensive.
Although these fees can increase the overall cost of a USDA loan, they’re still often more affordable than PMI in conventional loans. But how do these fees compare to PMI in terms of monthly payments? Let’s find out.
How The USDA Guarantee Fee Works
The upfront guarantee fee is paid at closing, but what about the annual fee? This is where the real difference lies. The annual guarantee fee is much like PMI in that it’s added to your monthly payment. However, it’s typically lower than PMI, making it a more affordable option for borrowers.
For example, if your loan balance is $150,000, the annual guarantee fee would be about $525 per year, or roughly $44 per month. Compare this to the PMI cost on a conventional loan, which can be higher depending on your loan size and down payment. As a result, USDA loans can offer significant savings when it comes to ongoing mortgage costs.
With lower monthly fees and no PMI, USDA loans are often an attractive option. But are there any other reasons you might want to consider a USDA loan? Let’s look at the advantages.
Advantages of USDA Loans Compared to Conventional Loans
There are a number of advantages that USDA loans provide, which is why they are an enticing option for a lot of people who are looking to buy a house. First, the fact that there’s no PMI requirement is a huge win for buyers. But that’s not the only advantage.
For one, USDA loans typically have lower interest rates than conventional loans, making them more affordable over the life of the loan. Additionally, USDA loans are available with little or no down payment, which is a huge benefit for first-time homebuyers or those who may not have significant savings for a large down payment.
Another benefit is that USDA loans have more flexible credit score and income requirements compared to other types of loans. This can make them accessible to a wider range of buyers, especially those who may not qualify for conventional financing.
But eligibility is key when it comes to USDA loans. Let’s take a closer look at what you need to qualify for a USDA loan. Learn more about eligibility here
Second, your household income must fall within the USDA’s income limits. These limits vary by location and family size, but they generally target households earning no more than 115% of the median income for the area.
Lastly, while USDA loans don’t have strict credit score requirements, having a solid credit history can help. Many lenders will look for a score of at least 640, though it’s not a hard rule. Your debt-to-income ratio will also be taken into account during the approval process.
Now that you know what’s required to qualify, how do you apply for a USDA loan? Let’s walk through the application process.
Conclusion
In summary, USDA loans do not have traditional PMI, which is one of their biggest advantages. Instead, they charge a guarantee fee that helps maintain the program and protect lenders. With no PMI, lower interest rates, and flexible eligibility requirements, USDA loans can be a great option for buyers in qualifying rural and suburban areas.
If you think a USDA loan might be right for you, it’s time to explore your options and apply. The benefits are clear, and with the right preparation, you could be on your way to homeownership sooner than you think.