If you’re like most people, you will likely evaluate all your options for finding the best mortgage for your dream home.
You’ve probably heard of the FHA loan and how it requires a PMI, and you’re now considering the USDA loan as an option. Does it also have PMI?
Well, the answer is a resounding “Nope!” That’s right, with a USDA loan, you don’t have to worry about pesky PMI payments eating away at your hard-earned cash.
In this article, we will give you all the information you need about this and help you make an informed decision that is best for your financial situation.
Ready? Let’s get to it.
What is a USDA Loan?
Before we dive into the question of PMI, let’s first define what a USDA loan actually is and how the loan program works.
A USDA loan is a government-backed mortgage designed to help low- to moderate-income families in rural areas purchase homes.
These loans offer competitive interest rates and require no down payment, making them an attractive option for many homebuyers.
However, there are some specific requirements that must be met to qualify for the program. Examples are the income and geographical limits for this loan.
What is Private Mortgage Insurance (PMI)?
What is a PMI, and why is it important?
Well, private mortgage insurance is a type of insurance that protects lenders in case a borrower defaults on their mortgage payments.
It is typically required when you put down less than 20% of the home’s purchase price as a down payment, which is usually the case with FHA loans and conventional loans.
PMI can add hundreds of dollars to your monthly mortgage payment, so understanding it is crucial.
Does a USDA Loan Require PMI?
As we’ve established, the good news for those considering a USDA loan is that it does not require private mortgage insurance.
But hold on. Before you apply for a USDA loan, hear this:
USDA loans and USDA construction loans are backed by the government and have their own form of mortgage insurance called a guarantee fee.
The fee is typically lower than PMI and can be rolled into your monthly mortgage payment. Unlike the FHA, another government-backed loan program.
What is the PMI Rate for a USDA loan?
The PMI rate for a USDA loan is zero. USDA loans no longer require private mortgage insurance. Instead, they have a guarantee fee, which is their form of mortgage insurance.
The guarantee fee is made up of an upfront fee and an annual fee, which are typically lower than PMI rates. The upfront fee is a one-time payment of 1% of the total loan amount, while the annual fee is usually 0.35% but can be as much as 0.50%.
These fees are non-refundable and remain for the life of the loan.
How Much is PMI on a USDA loan?
Luckily, there PMI is not required for USDA loans. Instead, you pay a guarantee fee in two parts; an upfront fee of 1% and an annual fee of 0.35%–0.50% on the loan amount.
How much you pay exactly depends on the amount of loan you secured on your USDA application.
What is the USDA Guarantee Fee?
The USDA guarantee fee is a form of mortgage insurance that is required for all USDA loans. This fee protects the lender in case you default on your loan payments.
It comprises two parts; the upfront fee and the annual fee.
- Upfront fee: This is a one-time fee that is paid at closing and is typically 1% of the total loan amount. The USDA upfront fee serves as an additional form of mortgage insurance to offset the cost of administering the loan program. It can be paid in cash at closing or rolled into the loan amount. Rolling it, however, will increase your monthly mortgage payment.
- Annual fee: This is calculated based on the remaining principal balance of the loan and is paid in monthly installments. The annual fee for a USDA loan is usually 0.35% but can be as much as 0.50%. The exact amount depends on several factors, including the size of your loan, the term of your loan, and your credit score.
Note that these fees are non-refundable and cannot be waived, so it’s important to factor them into your overall budget when considering a USDA loan.
However, unlike PMI, the guarantee fees do not increase over time as you pay off your loan or as your home increases in value.
Does the USDA Mortgage Insurance Go Away?
Unlike private mortgage insurance, USDA mortgage insurance does not go away. Instead, it remains for the life of the loan.
The USDA allows you to refinance the loan into a conventional loan, but you’ll still have to pay the USDA guarantee fee.
How to Get Rid of PMI on USDA Loan?
Many homeowners with USDA Loans look for ways to get rid of PMI and save money. Luckily, there are several ways to do this. With these options, you can say goodbye to PMI and keep more money in your pocket.
- The first step is to contact your lender to explore what options are available to you.
- One option may be to refinance your USDA Loan into a conventional loan to help you avoid or reduce PMI payments.
- You can also request a PMI cancellation from your lender if your mortgage balance is 80% or less of your home’s appraised value.
- Accelerating your mortgage payments can help you pay down your mortgage balance faster and reach the 80% loan-to-value ratio sooner.
- Making home improvements that increase the value of your home can also help you reach the 80% loan-to-value ratio faster and qualify for PMI cancellation.
Frequently Asked Questions
How long does PMI last on a USDA loan?
The upfront and annual guarantee fees for USDA loans are nonrefundable and will remain for the life of the loan. But at no time will you need a PMI on a USDA loan.
How is PM calculated on a USDA loan?
PMI is calculated on a USDA loan based on the loan-to-value ratio, or LTV.
The LTV is the ratio of the mortgage amount to the appraised value of the home. The higher the LTV, the higher the PMI payments will be. The PMI rate for USDA loans is typically 0.35% of the loan amount per year, divided into 12 monthly payments.
This rate may vary depending on factors such as credit score and loan amount. To calculate your PMI payments, simply multiply your loan amount by the PMI rate and divide by 12.
Is a USDA Loan Right for You?
If you live in a rural area and do not have the best credit or a large down payment saved up, a USDA loan may be a great option for you. And to sweeten the deal even further, it’s without a PMI.
With the mortgage industry changing so much, it may be a great time to take advantage of this while you can.
But before you dive headfirst, call us, and let’s lay out a completely foolproof approach ahead of you to secure your loan and begin your journey to home ownership.
