USDA Guarantee Fee: How the Upfront and Annual Fee Structure Works

Every USDA guarantee fee starts with one simple promise. The government stands behind your mortgage so a lender will approve you with zero down. That backing comes with a price, and you pay it in two parts: a one-time upfront guarantee fee and an annual fee that shows up in your monthly payment.

I spent years as a loan officer walking buyers through these numbers. Most people expect the fee to be a deal breaker. It almost never is. Once you see how small the charges run compared to other loan types, the USDA loan often looks like the best deal on the table for rural and suburban buyers.

What Is the Guarantee Fee on a USDA Home Loan?

The United States Department of Agriculture runs the Single Family Housing Guaranteed Loan Program through USDA Rural Development. Under this loan program, private banks and mortgage companies make the loans. The USDA then backs each one with a loan guarantee.

If a borrower stops paying and the home goes to foreclosure, the lender files a loss claim with the USDA. The agency covers up to 90% of the lender's loss. That safety net lets lenders offer 100% financing and lower rates to buyers in an eligible rural area.

The guarantee fee pays for that protection. It works much like mortgage insurance on other loans. Fee money flows back into the program so the USDA can keep backing new loans without leaning as hard on taxpayers.

The USDA guarantee loan has a sister program called the Section 502 Direct loan. The Section 502 loan under the direct program comes straight from the USDA, targets lower-income households, and can include a payment subsidy. It does not charge the guarantee fee. This article focuses on the guaranteed version, which most buyers use.

Current USDA Guarantee Fee Rates for FY 2027

The USDA sets its guarantee fee rates each federal fiscal year and publishes them in the Federal Register. For fiscal year 2027, which runs from October 1, 2026 through September 30, 2027, the rates did not change.

Fee	FY 2027 Rate	Based On	When You Pay
Upfront guarantee fee	1.00%	Base loan amount	At closing, or financed into the loan
Annual guarantee fee	0.35%	Average unpaid principal balance	Monthly, as part of your payment

These same rates apply to both purchase and refinance loans. The USDA has held the fee at 1% and 0.35% since October 2016. Before that date, buyers paid 2.75% upfront and 0.50% per year.

The Housing Act of 1949, which created the Section 502 program, caps how high these fees can go. The upfront fee cannot top 3.5% and the annual fee cannot top 0.5%. Today's rates sit well below both limits.

Upfront fee: 1.00% of the base loan amount
Annual fee: 0.35% of the average unpaid balance, split into 12 monthly charges
Same rates for purchases and refinances in FY 2027
Rates unchanged since fiscal year 2017
No guarantee fee on Section 502 Direct loans

How the Upfront Guarantee Fee Works

The upfront charge equals 1% of your base loan amount. On a $250,000 loan, that comes to $2,500. You have three ways to cover it.

Most buyers roll the fee into the loan. The USDA allows this even if it pushes your loan above the home's appraised value. A $250,000 base loan becomes a $252,500 total loan. You bring no extra cash to closing for the fee.

You can also pay the fee in cash at closing, along with your other closing costs. This keeps your loan balance a bit lower and trims your monthly payment by a few dollars.

The third option is to have the seller pay it. USDA rules allow seller concessions toward closing costs, and the upfront fee counts as an eligible cost. In a buyer's market, this is one of the easiest asks you can make.

Keep one detail in mind. A financed fee raises your balance, so you pay interest on it for the life of the loan. The annual fee also gets figured on that larger balance. On a $2,500 fee, the extra cost runs only a few dollars a month, but it adds up over 30 years.

How the Annual Fee Affects Your Monthly Payment

The annual guarantee fee works differently. Your lender calculates 0.35% of the average scheduled unpaid principal balance for the year. That figure gets divided by 12 and added to your monthly payment.

On a $252,500 loan, the first-year annual fee comes to about $884, or roughly $74 a month. As you pay down principal, the balance shrinks and the fee drops a little each year. The lender collects it from you and sends it to the USDA once a year.

Unlike private mortgage insurance on a conventional loan, the USDA annual fee does not cancel when you hit 20% equity. It stays for the life of the loan. The only way to drop it is to pay off the loan or refinance into a different loan type.

Your interest rate matters more than the fee in most cases. Mortgage rates on USDA loans tend to run at or below rates on FHA and conventional loans, because the government backing lowers the lender's risk. A good rate can easily offset the cost of the annual fee.

USDA Loan Payment Examples by Loan Amount

The table below shows how both fees play out at different price points. The examples use a 30-year fixed rate of 6.25% and assume the buyer finances the upfront fee. Taxes and home insurance are not included.

Base Loan	Upfront Fee (1%)	Total Loan	First-Year Annual Fee	Monthly Annual Fee	Principal and Interest
$150,000	$1,500	$151,500	$530	$44	$933
$200,000	$2,000	$202,000	$707	$59	$1,244
$250,000	$2,500	$252,500	$884	$74	$1,555
$300,000	$3,000	$303,000	$1,061	$88	$1,866
$350,000	$3,500	$353,500	$1,237	$103	$2,177

Annual fee figures are first-year estimates based on the starting balance. Your lender's exact number uses the average balance for the year, so it will come in a touch lower. To run your own numbers with taxes and insurance, use our USDA mortgage payment calculator.

USDA Mortgage vs. FHA and Conventional Loan: Comparing Types of Loans

Every low-down-payment loan charges something to protect the lender. The question is how much. Here is how a USDA mortgage stacks up against the other common types of loans on a $250,000 base loan.

Loan Type	Minimum Down Payment	Upfront Charge	Ongoing Charge	Can It Be Removed?
USDA guaranteed	0%	1.00% ($2,500)	0.35% per year (about $74/month)	No, lasts the life of the loan
FHA	3.5%	1.75% UFMIP ($4,375)	0.55% per year for most buyers (about $115/month)	Only with 10% or more down, after 11 years
Conventional with PMI	3%	None for PMI, but loan-level price adjustments may apply	Varies by credit score and down payment	Yes, at 20% to 22% equity

The Federal Housing Administration charges a 1.75% upfront mortgage insurance premium plus an annual premium that runs about 0.55% for most buyers. That makes FHA close to twice as expensive as USDA on both fronts. See our full USDA versus FHA comparison for a side-by-side look.

A conventional loan has no upfront guarantee fee. Private mortgage insurance can cost less than the USDA fee for buyers with strong credit and a bigger down payment. It also drops off once you build enough equity. For buyers with modest credit and no savings for a down payment, though, USDA usually wins on total borrower cost.

USDA has the lowest upfront charge of the three zero- or low-down options
USDA's 0.35% annual fee runs well below FHA's annual MIP
Conventional PMI can be cancelled, but USDA and most FHA charges cannot
Credit score and down payment drive conventional PMI pricing
Government-backed mortgage programs carry fees that do not change with your credit

Why the Lender and the USDA Need This Fee Structure

The USDA guaranteed program is a government-backed mortgage product that runs on thin margins. When a loan fails, the agency pays the lender's claim. Fee income helps cover those claims and keeps the program running.

Back in fiscal year 2016, the upfront fee sat at 2.75%. Strong loan performance let the USDA cut it to 1% in October 2016. The annual fee dropped from 0.50% to 0.35% at the same time. Those cuts saved the average buyer thousands of dollars at closing.

Fiscal Year	Upfront Fee	Annual Fee
FY 2016	2.75%	0.50%
FY 2017 through FY 2027	1.00%	0.35%

The lender also benefits. With the guarantee in place, the bank can sell the loan on the secondary market more easily. The lender does not need to underwrite to the tighter standards a non-guaranteed zero-down loan would demand. That stability is what keeps USDA rates low.

Do Refinance Loans Pay the USDA Guarantee Fee?

Yes. If you already have a USDA loan and want to refinance into a new one, the same 1% upfront and 0.35% annual rates apply in FY 2027. This covers the streamlined-assist refinance, the standard streamline, and the non-streamlined option.

You can usually roll the new upfront fee into the refinanced loan. Many owners use a USDA refinance to lock in a lower rate while keeping the same low annual fee. Learn more about your options on our USDA streamline refinance page.

USDA does not offer cash-out refinancing, and it does not offer a reverse mortgage. If you want to tap equity, you would need to refinance into another loan type, which ends the USDA fee but brings that program's own charges.

Who Is Eligible for a USDA Loan?

The fee only matters if you qualify. To be eligible for a USDA loan, you need to meet rules on location, income, credit, and use of the home.

The property must sit in a USDA-eligible rural area, which includes many small towns and suburbs
Household income cannot exceed 115% of the area median income
The home must be your primary residence (owner-occupancy is required)
Most lenders want a credit score of 640 or higher for automated approval
Your debt-to-income ratio should generally stay near 29% for housing and 41% for total debt
You must be a U.S. citizen, noncitizen national, or qualified alien

For details on each rule, read our guides on USDA loan eligibility requirements, USDA household income limits, and credit standards for USDA borrowers. Meeting eligibility rules has nothing to do with the fee amount. Every approved borrower pays the same rates.

How to Apply for a USDA Loan and Plan for the Fees

When you apply for a USDA loan, you work with a USDA-approved lender, not the USDA itself. The lender reviews your file, runs it through the USDA's automated system, and sends it to Rural Development for a final guarantee.

Here is how to plan for the fee as you get a USDA loan:

Ask your lender for a Loan Estimate that shows the upfront fee and the monthly annual fee
Decide whether to finance the upfront fee or pay it in cash
Ask the seller to cover the fee as part of your offer when the market allows
Compare your USDA quote against FHA and conventional quotes from the same lender
Budget for the annual fee as a permanent part of your housing cost

One timing tip: the USDA often runs short on funding for about a week at the start of each fiscal year in early October. Lenders can still close loans during that gap, but final guarantees may wait. If you plan to close in early October, ask your lender how they handle it. For a full rundown of costs, visit our USDA closing costs breakdown.

Frequently Asked Questions About the USDA Guarantee Fee

Is the USDA guarantee fee the same as mortgage insurance?

It serves the same purpose. The fee protects the lender if you default, much like FHA mortgage insurance or private mortgage insurance. The USDA calls it a guarantee fee because the agency itself backs the loan.

Can I avoid the upfront guarantee fee?

You cannot skip it on a guaranteed loan, but you do not have to pay it in cash. You can finance it into the loan or ask the seller to pay it as part of your closing cost concessions.

Does the USDA annual fee ever go away?

No. The annual fee lasts for the life of the loan. It shrinks slightly each year as your balance drops, and it ends only when you sell, pay off the loan, or refinance into a non-USDA loan.

Will the USDA guarantee fee go up in 2028?

The USDA reviews its rates each fiscal year and posts any change in the Federal Register. Rates have held at 1% and 0.35% since 2016. Any increase cannot exceed the legal caps of 3.5% upfront and 0.5% annual.

Does my credit score change the guarantee fee?

No. Every approved borrower pays the same rates regardless of credit score, income, or loan size. Your credit can affect your interest rate, but not the fee itself.

W.A. MacDonald, retired loan officer