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Explaining the USDA's Upfront and Annual Guarantee Fees

Chanilia Nixon

The USDA loan’s annual fee is 1% of the loan amount. This fee funds the guarantee that compensates lenders if the mortgage should ever default. It is this guarantee that gives lenders the confidence to extend home financing to those who may not be eligible for conventional financing.

All major government backed mortgages have a guarantee. With the VA loan, the guarantee equals 25% of the loan balance. With FHA and USDA loans, the lender is compensated 100% of the loan. All three require a form of mortgage insurance to finance the guarantee. The VA calls this premium the VA funding fee, with FHA it’s a mortgage insurance premium (MIP) and USDA calls their fee the Guarantee Fee.

How does the guarantee fee work?

With the USDA program there are two guarantee fees, just like the FHA loan – an upfront fee and an annual fee paid monthly. The upfront guarantee fee on a USDA loan is only 1% of the loan amount, down from 2.75% in 2016. Homebuyers can opt to roll this into the loan amount, preventing out of pocket costs. The annual fee for a USDA loan is just 0.35% of the loan amount, down from 0.50%.

For example, on a $200,000 home, the upfront guarantee fee is $2,000 and the annual fee is $58.92 per month. Homebuyers can use this handy USDA loan calculator to estimate their mortgage payment, complete with taxes, insurance and USDA guarantee fees.

The default rate for USDA loans is very low but still foreclosures do occur. When lenders cannot work out a payment arrangement and the borrowers can no longer pay the mortgage, the lender can foreclose on the property. The lender then makes a claim to the USDA and is later compensated up to 100% of the loan amount. Lenders can feel comfortable approving a USDA loan knowing that as long as the loan was approved using acceptable guidelines, the lender will be protected.