The USDA guarantee fee is what a buyer pays for the U.S. Department of Agriculture's guarantee on a USDA loan, the backing that lets lenders offer $0 down on single-family homes in eligible rural areas. It has two parts: 1.00% of the loan at closing and an annual fee of 0.35% collected in the monthly payment. Both run lower than FHA's mortgage insurance.
How the two parts are charged
The upfront fee is 1.00% of the loan, and nearly every USDA buyer finances it. USDA caps the loan at the appraised value plus the upfront fee, so the fee can go into the loan even when the home appraises exactly at the price.
The annual fee is 0.35% of the average scheduled balance for the year, divided into 12 monthly payments. As the loan is paid down, the annual fee shrinks with it. It stays for the life of the loan.
USDA compared with FHA on a $280,000 home
A buyer with $0 down on a $280,000 USDA home finances the $2,800 upfront fee, for a loan of $282,800. Principal and interest at a 5.75% rate is $1,650.34. In the first year the scheduled balance averages about $281,150, so the annual fee is about $984 for the year, or $82 a month.
| On a $280,000 home | USDA, $0 down | FHA, 3.5% down |
|---|---|---|
| Down payment | $0 | $9,800 |
| Upfront charge | 1.00%, $2,800 | 1.75%, $4,728.50 |
| Annual charge, first year | 0.35%, about $82 a month | 0.55%, about $123.84 a month |
The USDA buyer brings no down payment and pays about $42 a month less for the guarantee than the FHA buyer pays in annual MIP.
How the fee affects qualifying
USDA holds the housing payment to 29% of gross income and total debts to 41%, and the annual fee counts in the housing payment along with principal, interest, taxes and insurance. With taxes at 0.85% of the price ($198.33 a month) and insurance at $240 a month, this buyer's housing payment is $1,650.34 + $82 + $198.33 + $240 = $2,170.67. Divided by 0.29, that calls for gross income of about $7,485 a month.
USDA also caps household income by county, so the program serves buyers between those two lines. When the 29% ratio is tight, FHA 100% financing also gets a buyer in with $0 down and allows housing up to 46.9% of income.
The price check tool runs USDA and FHA on the same price so you can compare the payment and income each one needs. Call AAA Capital Funding at 888-601-8344 and we'll confirm whether the address sits in a USDA-eligible area.