Do USDA Loans Require Mortgage Insurance?
With 0% down and relatively low overall costs compared to other mortgage types, USDA loans are an incredibly affordable option for home buyers in eligible rural and suburban areas.
However, low or no down payment mortgage programs often come with costs in other areas to offset the risk that lenders assume. Most often, this comes in the form of mortgage insurance.
Do USDA loans come with mortgage insurance, and if so, how much does it cost? Lets look at everything borrowers need to know about USDA mortgage insurance.
A Quick Primer On USDA Loans
USDA loans are a type of mortgage. Theyre geared toward lower-income home buyers in areas deemed rural by the U.S. Department of Agriculture, the agency that guarantees these loans.
You can use the USDAs property eligibility map to see which areas are eligible for USDA loan funding. Land-wise, most of the U.S. is eligible for USDA funding; ineligible areas include cities and the areas immediately surrounding them.
USDA loans dont require a down payment, which removes a substantial barrier to homeownership that many would-be home buyers encounter. After all, a 3% down payment the lowest you can go on a conventional loan on a $250,000 home is $7,500. For those on lower or middle incomes, saving that much can take a long time.
Plus, allowing borrowers to get a mortgage with 0% down means they can hold onto their cash for other purposes, such as home improvements or emergency savings.
When it comes to interest rates, USDA loans are comparable to VA loans in that these mortgages typically offer lower rates than other loan programs, such as conventional or americashpaydayloan.com/title-loans-la/ FHA loans.
Typically, if a lender allows a borrower to buy a house with a low down payment, theyll require that the borrower pay to insure their loan with mortgage insurance. This is because when you make a lower down payment, the risk for the lender is larger than if you made a down payment of at least 20%. Mortgage insurance helps to protect the lender.
Private mortgage insurance (PMI) is the term used for mortgage insurance on conventional (non-government-backed) loans. So no, USDA loans dont require PMI; only conventional loans have PMI, and only on those loans where the borrower has less than 20% equity in their home.
Other loan programs may have their own forms of mortgage insurance. On FHA loans, mortgage insurance is referred to as a mortgage insurance premium (MIP). MIP is required on all FHA loans and comes with both an upfront premium and an annual premium. If you make a down payment of less than 10%, youll pay mortgage insurance for the life of the loan. If you make a down payment of 10% or more, youll pay it for 11 years.
VA loans dont have mortgage insurance, but borrowers do pay a funding fee, which is charged as a certain percentage of the loan amount and either paid at closing or rolled into the loan amount.
So, what about USDA loans? Similar to VA loans, USDA loans dont technically require mortgage insurance, but they do have whats called a guarantee fee, which works like mortgage insurance in helping to guarantee the loan.
When a government agency backs a loan, such as a USDA loan or an FHA loan, theyre essentially providing insurance to the lender. If the borrower defaults on a government-backed loan, that agency pays the lender to help them recoup their losses. Fees that come with these loan programs, such as the guarantee fee, help pay for that insurance.