What Is A USDA Guarantee Fee?

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.

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.

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.

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.

What's The Upfront USDA Guarantee Fee?

Although this is updated periodically by the USDA, by law, the maximum amount you can be charged for an upfront guarantee fee is 3.5% of the loan value. This fee is currently 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.