What Is A USDA Guarantee Fee?
Sean Bryant4-minute read
August 13, 2021
*As of July 6, 2020, Rocket Mortgage® is no longer accepting USDA loan applications.
With housing prices on the rise across the United States, saving 20% for a down payment might seem impossible. Luckily, there are government programs available that can make homeownership a reality at a much lower upfront cost.
If living outside the city limits is ideal for you, a USDA loan might be the perfect fit. USDA loans are issued through the United States Department of Agriculture and offer rural home buyers access to low interest rates and no down payment.
Before we go over the costs involved with a USDA loan, let’s look at how the loan program actually works.
How Does A USDA Loan Work?
USDA loans are intended for low-to-moderate income households with the goal of providing affordable housing in qualifying areas that are rural or on the edge of suburbia. The income levels required will vary depending on what area you’re looking to buy in and the size of your household.
Many people don’t even know USDA loans exist because many lenders don’t actively promote them. However, these loans aren’t a lot different from other available options, aside from a couple of important features. First, borrowers aren’t required to have a down payment to close on a loan. Second, the USDA loan program doesn’t offer adjustable rate mortgages. USDA loans are required to have a fixed rate. Every USDA loan has a 30-year term.
Who Qualifies For A USDA Loan?
Qualifying for a USDA loan goes beyond just purchasing a home in a rural community.
The USDA has certain qualifications that need to be met by each borrower. Some of these eligibility requirements include:
- You must be a U.S. citizen or permanent resident.
- The loan must be for an owner-occupied, one-unit primary residence.
- You must have a reliable income source that doesn’t exceed 115% of the median income in your area. An important note here is that, unlike other loan options, USDA considers income from all adult members of the household. You can deduct child care expenses, and only a limited amount of income is counted if someone is a full-time student.
- There are limits in terms of how much of your monthly income can go toward your mortgage payment as well as your overall debt.
- You should have a credit score of at least 640. If you don’t have a credit score or you have a limited credit history, you might still qualify. However, lenders can set their own standards. Rocket Mortgage® requires a median FICO® Score of 640 or higher.
Now that you have a better understanding of what a USDA loan is, let’s look closer at the costs.
How Much Are Closing Costs For USDA Loans?
USDA loans come with a lot of benefits, but they also have some costs associated with them. Like nearly every other type of home loan, you’ll be required to pay closing costs. These costs can be anywhere from 3% – 6% of the loan value.
The closing costs are made up of many different items, including the following:
- Origination fees
- Underwriting fees
- Title insurance
- Appraisal fee
- Notary fee
- Credit report fee
- Well, septic and termite inspection
- Discount points
There are several options available for paying closing costs. It’s possible that you may be able to roll the costs into your loan amount. If the seller is motivated, they may also agree to pay a portion or all of the costs themselves. However, this is usually more of an option when the housing market is slow compared to when homes are selling quickly.
How Do You Calculate The USDA Guarantee Fee?
One of the benefits of a USDA home loan is that they guarantee the loan from banks and other lenders. However, in exchange for this guarantee, borrowers will be required to pay both a USDA upfront guarantee fee upon closing the loan and an annual guarantee fee each year thereafter.
The maximum amount you can be charged for a USDA guarantee fee is 3.5% of the loan value. In 2019 this fee is set at 1% and is calculated based on the loan amount. The total loan amount can include closing costs, property upgrades, property taxes and other necessary furnishings to the home.
Let’s assume you’re purchasing a home with a loan amount of $160,000 and closing costs of $5,000. The USDA funding fee would be calculated based on 1% of $165,000, or $1,650. You’ll have the option to either pay the USDA funding fee at closing or you can roll it into your mortgage.
What Is The USDA Guarantee Fee For 2019?
The maximum amount that can be charged yearly for the USDA guarantee fee is 0.5%. In 2019 the fee is set at 0.35% of the annual unpaid loan balance. This fee is typically charged to the lender by the USDA and it’s then passed along to the borrower to be paid monthly out of an escrow account.
Assuming you had an outstanding mortgage balance of $125,746 to start 2019, the USDA guarantee fee in 2019 would’ve been $440.11 based on your amortization schedule, or $36.68 per month.
If you think a USDA loan is the ideal loan for your upcoming home purchase, you can get started with Rocket Mortgage® today or create an account online with Rocket HQSM. You can also get in touch with one of our Home Loan Experts at (800) 785-4788 or browse our resources for home buying and personal finances.
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