Is There Mortgage Insurance on a USDA Loan?

Homeownership can seem challenging due to significant upfront costs. Government-backed mortgage programs, like the USDA loan, aim to make it more attainable. Specifically designed for rural and suburban areas, a common question about USDA loans is whether they involve mortgage insurance, a feature present in many other loan types.

Understanding USDA Loans

USDA loans are a component of the U.S. Department of Agriculture’s Rural Development housing program, established to foster homeownership and improve the quality of life in rural America. These loans are not directly issued by the USDA but are provided by approved lenders and guaranteed by the USDA. This government backing reduces risk for lenders, allowing them to offer favorable terms to eligible borrowers.

A notable characteristic of USDA loans is the zero down payment requirement, making them attractive for individuals without substantial savings. To qualify, borrowers must meet specific income limitations, set annually and varying by location and household size, generally not exceeding 115% of the area’s median income. The property must also be located within a USDA-designated eligible rural or suburban area, serving as the borrower’s primary residence.

Mortgage Insurance on USDA Loans

USDA loans include a form of mortgage insurance, referred to as the “Guaranteed Fee” or “Guarantee Fee.” This fee protects the lender in case of borrower default and helps fund the USDA loan program. It is a mandatory component for all USDA loans, reflecting the government’s guarantee to the lender. The fee consists of two separate charges: an upfront fee and an annual fee.

Calculating and Paying USDA Mortgage Insurance

The upfront Guaranteed Fee is calculated as a percentage of the total loan amount. For 2025, this fee is typically 1% of the loan. Borrowers can finance this upfront fee into their loan, adding it to the principal balance rather than paying out-of-pocket at closing. This allows for a zero cash down payment.

In addition to the upfront fee, USDA loans also have an annual Guaranteed Fee. This fee is currently 0.35% of the outstanding principal balance. Although calculated annually, this fee is divided into twelve monthly installments and included as part of the regular mortgage payment. As the loan balance decreases over time with each payment, the annual fee gradually reduces, leading to a slight decrease in the monthly payment portion attributed to this fee.

Canceling USDA Mortgage Insurance

Unlike some conventional loans where private mortgage insurance (PMI) can be canceled once a certain loan-to-value (LTV) ratio is achieved, the annual USDA Guaranteed Fee generally remains for the entire life of the loan. This means that even as a borrower builds equity, the annual fee typically continues to be a part of their monthly mortgage payment. The primary ways to eliminate the annual Guaranteed Fee involve either paying off the loan in its entirety or refinancing into a different loan program. For instance, a borrower might choose to refinance their USDA loan into a conventional loan once they have accumulated sufficient equity, often 20% or more, to avoid paying private mortgage insurance on the new loan.