The United States Department of Agriculture announced that starting Oct. 1 they will lower the fees associated with their 100% financing home loan program to the following amounts:
Monthly Mortgage Insurance
These new fees will make USDA home loans one of the cheapest programs available, second only to VA loans (military service required).
What is a USDA home loan?
A USDA home loan is a 100% financing no down payment loan program backed by the U.S. Department of Agriculture. The full name of the loan program is The USDA Rural Development Guaranteed Housing Loan. The program was created to promote development in rural areas, but the definition of rural is pretty generous. Many suburban areas are eligible for a USDA home loan. Check to see if your home is in an eligible area.
Fees Associated with USDA Home Loans
The two fees associated with USDA loans are the upfront fee and monthly mortgage insurance. The strength of the USDA loan program can cause annual changes to these two fees. As the strength of the program increases, these fees will decrease and vice versa. Recently the USDA home loan program saw historically low delinquencies and foreclosures, which resulted in the lower fees mentioned above. The announced fees will be effective from October 1, 2016 until September 30, 2017. Even though it’s possible that these two fees can change annually, once you’ve closed on your mortgage the fees will not change unless you refinance.
1. Upfront Fee
The upfront fee is a one-time fee paid at the beginning of your mortgage, typically added to your total loan amount. The lower upfront fee will significantly reduce the amount added to the loan, which results in lower monthly payments. For example, on a $200,000 loan the current upfront fee of 2.75% would cost $5,500. An upfront fee of 1.00% would only cost $2,000, instantly saving you $3,500.
2. Monthly Mortgage Insurance
Mortgage insurance on a USDA loan provides the lender with a financial guarantee in case something goes wrong with the loan. Mortgage insurance is paid annually, but to make it easier to pay it’s broken down into monthly payments. Currently the mortgage insurance on a USDA loan is 0.5% of the loan amount. Using our $200,000 loan example, that would be $1,000 each year, or $83.33 added to your monthly payment. With the new mortgage insurance of 0.35%, you will save $300 a year or $25 on each monthly payment.
How much of a difference do these changes make?
The reduced fees to USDA loans could be the difference between getting an approval or denial on your home loan. To qualify for any loan you need to meet a certain debt-to-income ratio. The savings from these lower fees could decrease your debt, making you eligible for a loan that otherwise would be unattainable. As an example, on a 30 year $200,000 loan the total savings from the lower fees would be over $10,000 ($3,500 in upfront fees and the rest from lower monthly mortgage insurance).
If I Already Have a Mortgage, Can I Benefit From the Lower Fees?
If you’re already in a USDA home loan, then you can refinance your loan to lower your rate and monthly payment. There is a USDA Streamline Refinance Program that makes this process quick and easy. The streamline does not require a credit report or home appraisal! With the streamline program, you can choose between the 15 and 30 year options for your new home loan and close within a few weeks.