If you’ve been shopping around for a USDA loan, you may have come across the term “guarantee fee.”
Understanding this fee is crucial when looking into getting a USDA loan as it could significantly affect how much you pay each month in mortgage payments.
In this article, we’ll explain what a guarantee fee is, how it’s calculated, who pays it, and why it’s required for USDA loans.
By the end of it all, you should have a better understanding of this important fee and be better equipped to make an informed decision regarding your USDA loan application.
Let’s get started!
How is the Guarantee Fee Calculated?
This guarantee fee is charged by the USDA as insurance in case of default on monthly payments – similar to mortgage insurance but with some key differences.
The fee is determined as a percentage of the loan amount and can vary depending on the type of loan. In 2024, for instance, a USDA single-family direct loan requires only a 1% fee while an equivalent USDA guaranteed loan requires 1.0% of its amount. The rate is the same for the USDA construction loan.
The guarantee fee can be paid in full at closing or it can be included in the loan amount and paid over time through monthly payments. Keep in mind that including it in your mortgage payment may increase monthly mortgage payments.
Who Is Responsible for Paying the Guarantee Fee?
You are ultimately liable for paying the guarantee fee. It can be rolled into your loan amount so that you don’t need to pay it upfront. Instead, it becomes part of your monthly mortgage dues.
USDA guarantee fee is typically a one-time payment; once the guarantee fee is paid, it does not need to be paid again during the life of the loan.
Are There Any Exemptions to Paying the Guarantee Fee?
If you’re applying for a USDA loan and wondering if there are exceptions to the guarantee fee, the answer is yes. There are several exemptions from paying the USDA loan guaranteed fee, such as:
- Low-income borrowers: If you are a low-income borrower, you may qualify for a reduced guarantee fee of as little as 1% of the loan amount, instead of the standard 1.5%. Your household income must fall below 80% of your Area Median Income (AMI) to receive this reduced fee.
- Veterans with service-related disabilities: If you are a veteran with an applicable service-related disability, the guarantee fee may not apply to you. This exemption is available for both purchase and refinance USDA loans.
It’s worth noting that although these exemptions exist, not everyone qualifies. Speak with your USDA-approved lender to see if you qualify for any reduction or exemption.
Why Is a Guarantee Fee Required for USDA Loans?
Included in the requirements for a USDA loan, there are various reasons why a guarantee fee is necessary for USDA loans, including:
- Allows the USDA to offer loans to borrowers with bad credit: By requiring a guarantee fee, they take on more risk than traditional lenders and make homeownership more accessible if you don’t meet other loan criteria.
- To safeguard the lender: A guarantee fee is a fee charged by the USDA to guarantee part of your loan amount in case you default. It’s like insurance for lenders; it helps reduce their risk.
- To sustain the USDA loan program: The fee goes toward funding USDA Rural Development programs and covering any losses incurred by the USDA when guaranteeing loans. This ensures that future borrowers can access this assistance when they need it most.
How Does the Guarantee Fee Affect the Cost of a USDA Loan?
Here’s how the guarantee fee affects the overall cost of a USDA loan:
- Increases loan balance: This adds thousands of dollars in additional interest charges, leading to significant increases in overall costs over its life.
- Increases your monthly contributions: For instance, if you take out a $200,000 USDA loan with a 1% guarantee fee, the fee amount would be $2,000. Adding this fee onto the loan balance means paying an extra $10 monthly over 30 years.
Keep in mind that understanding this and how the USDA loan works as a whole puts you in a better place to have a smooth and successful loan process.
How Can You Reduce the Guarantee Fee?
Here is how you can reduce the guarantee fee:
- Compare rates and fees from different lenders: Each lender may have different fees and policies, so do some research and find which option best fits your circumstances.
- Check for available discounts: If you have a low to moderate income or are purchasing in designated rural areas, you may qualify for a reduced guarantee fee.
- Make a larger down payment: The guarantee fee is calculated as a percentage of the loan, so the more money you can put down upfront, the lower your assurance fee will be.
Frequently Asked Questions
Can the guarantee fee be financed into the loan?
Absolutely. You may finance the USDA guarantee fee into your loan in order to reduce upfront costs and free up cash for other expenses. Bear in mind that interest on this fee will accrue and be added onto your principal balance over the course of your loan term, meaning both principal and interest payments as well as any guarantee fees will accrue interest.
How does the USDA loan guarantee fee compare to other mortgage fees and costs?
The USDA loan assurance fee is relatively affordable when compared with other costs and fees. At 1% on the loan amount, it’s lower than the 3-5% required for a conventional loan down payment. Plus, you can finance it into your loan – meaning you won’t owe it at closing!
Similarly, unlike the USDA, loan options like the FHA do not come with a guarantee fee. You may explore them if you want to skip the fee altogether.
Remember that although the USDA loan guaranteed fee may appear lower than other fees and costs, additional expenses such as title search, appraisal, home inspection, and other closing costs may still apply.
Is the guarantee fee refundable?
Yes, the guarantee fee for a USDA loan is refundable under certain conditions. Examples of when this may apply to include:
- If you pay more than the required guarantee fee, then you are eligible for a refund.
- If the USDA rejects your loan application, you will receive a full refund of the guarantee fee.
- If you pay the fee but ultimately decide not to close on the loan, that fee too can be refunded.
- If you pay off your USDA loan before its maturity date, any remaining guarantee fees may be prorated and refunded.
When is the guarantee fee paid?
This fee must be paid at closing and can either be paid in cash or rolled into your loan. It’s calculated based on the loan amount and expressed as a percentage, so make sure to discuss any concerns with your lender beforehand.
Summary
A guarantee fee on a USDA Loan is an upfront charge that applies to all USDA loans.
The fee is crucial to the USDA loan program; it guarantees the loan in default and ensures the USDA can continue providing loans to rural applicants
Got questions about the USDA loan guarantee fee? Give us a call. We can help you reduce your fee or verify if your application qualifies for exemptions.
