Do USDA Loans Require PMI?
When you compare a USDA loan to an FHA loan, it is important to understand the terminology and how the different borrowing costs can affect your budget and the price of home you may qualify for.
In today’s video, I will show you the facts and also key differences between USDA, FHA, and Conventional financing.
However, before we get started feel free to download our newest “How To” help guide with the link below. This educational resource is designed to show buyers and their agents how to be proactive and handle the home loan process so you can stay out of trouble before it sneaks up on you!
Is Mortgage Insurance required for a USDA Loan?
PMI (Private Mortgage Insurance) exists on conventional loans when the down payment is less than 20%, and can be paid in a variety of different ways. The Homeowner’s Protection Act allows for PMI to be terminated automatically or by request when the balance is paid down to 80% or less of the original value of the property.
FHA loans include MIP (Mortgage Insurance Premium) and it is paid monthly.
When your down payment on an FHA loan is less than 10%, you will be required to pay mortgage insurance for the life of the loan. When the down payment on an FHA loan is 10% or greater, FHA mortgage insurance will be removed after 11 years.
Also, FHA charges a one-time financed mortgage insurance premium which is equal to 1.75% of the loan amount. While that may seem like a lot, thankfully they allow you to finance that into the loan and does not have to be paid out-of-pocket.
Do USDA Loans Have PMI?
Here’s the good news – USDA Loans do not technically have mortgage insurance Instead, they have an “annual premium” and even though it is for the life of the loan, it is over two times lower when compared to FHA monthly mortgage insurance fee!
Similar to FHA’s financed mortgage insurance, USDA also charges a Guarantee Fee, but it is only 1% and it can also can be financed into the loan.
Here is a current example of how the monthly costs compare between USDA and FHA:
$100,000 Loan Amount Example Comparing USDA and FHA Costs:
- FHA MIP: .85% X 100,000 = $850 / 12 = $70.83 per month
- USDA Premium: .35% X $100,000 = $350 / 12 = $29.17 per month
Also, as mentioned, a here is how the one-time financed charged compared:a
- FHA 1.75%: $1,750
- USDA 1%: $1,000
As you can see, even though USDA Loans do NOT require a down payment, their borrowing costs are better in comparison to FHA loans which does require a minimum 3.5% down payment.
Also, remember that your closing costs can be financed with a USDA loan when the appraised value is higher than the purchase price. FHA loans do not allow this benefit.
Both FHA and USDA program costs are subject to change and as of today we are using the most updated calculations for example and illustration purposes. Please note that all terms and comparisons lists are subject to change without notice.
As an approved USDA lender in Florida, Texas, Tennessee, and Alabama, we hold expertise in the USDA process and are a one stop point of contact from pre-qualification through closing.
Just call or email if you have any qualifying questions, want to discuss a new scenario, or would just like to take advantage of our free 2nd opinion service which is great for those existing transactions