Do USDA Loans Have Mortgage Insurance?

USDA loans are government-backed mortgage options designed to help eligible individuals purchase homes in rural and designated suburban areas. These loans offer benefits, such as 100% financing, making homeownership accessible for many who might otherwise struggle with a down payment. A common inquiry among prospective homebuyers concerns whether these loans require mortgage insurance. This article clarifies the nature of these costs within the USDA loan program and how they are applied.

Understanding USDA Loan Insurance

USDA loans involve a form of mortgage insurance, referred to as “guarantee fees,” which are a standard requirement for all USDA-backed loans and serve a similar purpose to mortgage insurance in other loan types. The structure includes two distinct components: an Upfront Guarantee Fee and an Annual Guarantee Fee. These fees help protect lenders against potential losses if a borrower defaults on their loan. This protection allows the USDA to offer terms such as no down payment requirements and competitive interest rates to eligible borrowers. The fees also contribute to the program’s self-sufficiency, ensuring losses are covered through collected fees rather than relying solely on taxpayer funds.

How USDA Loan Insurance is Calculated

The Upfront Guarantee Fee is assessed as a percentage of the total loan amount. This fee is 1% of the original loan principal. Borrowers can pay this fee at closing or, more commonly, finance it directly into their loan amount, which increases the total loan principal. For instance, on a $250,000 USDA loan, the Upfront Guarantee Fee would be $2,500. If financed, the new loan amount would become $252,500.

An Annual Guarantee Fee is also applied. This fee is 0.35% of the outstanding principal balance. Unlike the upfront fee, the annual fee is not a one-time payment; it is divided into monthly installments and included as part of the borrower’s regular mortgage payment. For a loan with an initial balance of $252,500 (including the financed upfront fee), the annual fee in the first year would be approximately $883.75, or about $73.65 per month. This annual fee is recalculated each year based on the reduced outstanding principal balance, meaning the monthly payment for this fee will gradually decrease over time.

Duration of USDA Loan Insurance Payments

The Annual Guarantee Fee for USDA loans remains in effect for the entire duration of the loan. Unlike some other mortgage insurance policies that may cancel once a certain loan-to-value (LTV) ratio is achieved, the USDA annual fee does not automatically terminate. Borrowers pay this fee as a component of their monthly mortgage payment until the loan is fully satisfied. The fee will persist until the loan is either paid off, refinanced into a different loan type that does not require the fee, or the property is sold. Homebuyers considering a USDA loan should account for this ongoing cost as a consistent part of their housing expenses throughout the loan’s life.