Does USDA Require Mortgage Insurance?

The United States Department of Agriculture (USDA) Rural Development loan program helps low-to-moderate-income individuals and families purchase homes in eligible rural areas. These government-backed loans are known for their favorable terms, often allowing for no down payment. A frequent inquiry among potential borrowers concerns the requirement for mortgage insurance with these loans.

USDA Mortgage Insurance Requirement

USDA Rural Development loans require a “guarantee fee,” which functions as mortgage insurance. This fee protects the lender if a borrower defaults, especially important given the program’s zero down payment option. The guarantee fee has two components: an Upfront Guarantee Fee and an Annual Fee. These fees enable the program to offer competitive interest rates and flexible credit requirements to qualified borrowers.

Calculating USDA Mortgage Insurance Costs

The Upfront Guarantee Fee is a one-time charge, calculated as a percentage of the original loan amount. As of 2024, this fee is 1% of the loan. For example, on a $250,000 USDA loan, the upfront fee would be $2,500. This fee helps fund the USDA loan program and reduces lender risk.

The Annual Fee is a recurring charge, calculated as a smaller percentage of the outstanding principal balance. This fee is 0.35% of the loan’s unpaid balance. Unlike the upfront fee, the annual fee decreases over time as the loan’s principal balance is paid down. For example, on an initial $250,000 loan, the annual fee for the first year would be $875.

Paying USDA Mortgage Insurance

The Upfront Guarantee Fee is financed into the total loan amount, added to the principal balance instead of being paid at closing. This allows borrowers to avoid a large lump-sum payment at the time of purchase. For a $250,000 loan, financing the 1% upfront fee would result in a total loan amount of $252,500.

The Annual Fee is divided into 12 equal installments and incorporated into the borrower’s monthly mortgage payment. This fee is paid alongside the principal and interest portions of the loan. The annual fee is recalculated each year based on the remaining loan balance, so the monthly portion gradually decreases over the loan term.

Cancelling USDA Mortgage Insurance

Unlike private mortgage insurance (PMI) on conventional loans, which can be cancelled once equity is reached, USDA mortgage insurance cannot be cancelled. Both the Upfront Guarantee Fee and the Annual Fee remain in effect for the entire loan duration. The only ways to eliminate these fees are to pay off the loan in full or refinance it into a different mortgage type, such as a conventional loan, that does not carry these charges.