Do You Pay Pmi on a USDA Loan?

A rustic country home is surrounded by trees and hedgesDo you want to buy a home and wonder if USDA Loans require PMI? USDA loans are an attractive option for buyers who wish to purchase a home with no money down. While USDA loans do not require PMI, an annual fee is associated with them that works similarly.

In this article, we'll take a deep dive into USDA loans and provide an overview of private mortgage insurance (PMI) to help you decide which option is the best for you and your budget.

We'll also explain the USDA Annual Guarantee or Funding Fee, the eligibility requirements for USDA loans with no PMI, and how to calculate the cost of conventional loans with PMI compared to USDA loans. By the end, you'll be well-equipped to decide whether a USDA loan is right for you.

Understanding PMI on Conventional Loans

Private mortgage insurance (PMI) is crucial to numerous home loans, such as USDA. Lenders require this insurance to safeguard themselves from potential financial losses if a borrower fails to pay their monthly mortgage.

The borrower is responsible for paying PMI, and the rate and amount differ among lenders and loan types. In many instances, including USDA loans, PMI is mandatory for home loans to protect the lender from financial disaster.

The borrower bears the cost of PMI, and it is added to their monthly mortgage payment. The specific rate and amount for PMI on conventional loans and other types can differ among lending institutions.

The key is understanding that PMI enables borrowers to obtain their dream homes while offering lenders reassurance in the event of default. Conventional loans require PMI, and the rate is based on the loan-to-value ratio or the borrower's credit score.

However, USDA loans have a unique feature that allows borrowers to avoid paying for PMI. They are issued by the U. S. Department of Agriculture and are guaranteed by the USDA's Guaranteed Underwriting Authority (GUA).

This guarantee eliminates the need for PMI and replaces it with an annual fee, much lower than PMI's cost. This annual fee is typically calculated as an upfront fee at closing and then as a yearly fee included in monthly payments. This makes USDA loans a more attractive option for many homebuyers.

What is the USDA Annual Guarantee or Funding Fee?

The USDA guarantee or funding fee is an upfront fee added to a USDA Loan that helps the government offset the costs of providing home loans to low-income people. This fee is 1% of the total loan amount and can be paid upfront at settlement or included in the loan balance.

The price is used to pay the lender if the borrower defaults. This is why USDA loans do not typically require private mortgage insurance (PMI) as most conventional home loans. The USDA guarantee fee is an added layer of protection for the lender, reducing the risk of default if the borrower fails to make loan payments.

How Does the USDA Guarantee Fee Work?

USDA loans are a popular choice for low-income families, offering an affordable alternative to conventional mortgages with the added benefit of a USDA guarantee. This guarantee lowers the risk for lenders, making USDA loans more attractive for financing.

One significant difference between a USDA loan and conventional mortgages is the type of mortgage insurance required. While traditional loans typically need private mortgage insurance (PMI) to protect the lender, USDA loans call for USDA mortgage insurance instead.

The USDA guarantee fee is a one-time upfront payment that serves as the mortgage insurance for the life of the USDA-guaranteed loan. This fee is generally lower than the cost of PMI and is a non-refundable expense that aids in covering the costs of providing loan subsidies to low-income families.

Usually, the guarantee fee for USDA loans is 1% of the loan's total amount. The lower guarantee fee, in comparison to PMI, makes USDA loans more affordable for eligible applicants. Overall, USDA mortgage insurance is a cost-effective alternative to PMI, allowing more people to access homeownership through the USDA loan program.

As the USDA receives the guarantee fee instead of a private mortgage insurer, USDA mortgages are a valuable financial tool in making homeownership a reality for many families who might not otherwise qualify for conventional loans.

Is it Better to Pay the USDA Annual Fee, PMI, or MIP?

Borrowers must pay guaranteed yearly fees as part of the USDA loan program. The annual charge, usually 0.35% of the loan balance, is payable annually for the loan duration. Twelve payments of the yearly fee are paid together with the monthly mortgage payment.

The guarantee fee is a one-time fee of 1% of the loan amount usually rolled into the loan. While the USDA fees can be lower than PMI or MIP, borrowers must meet certain income and location requirements to be eligible for a USDA loan. The annual fee (USDA's version of PMI) can not be canceled.

In contrast, PMI is typically required for borrowers who put less than 20% down on home purchases. The cost of PMI can vary based on factors such as the borrower's credit score and the size of their down payment. However, PMI can be canceled once the borrower's equity in the home reaches 20%.

FHA loans require borrowers to pay an upfront fee of 1.75% of the loan amount, which can be rolled into the loan. In addition to the upfront cost, borrowers must also pay a monthly mortgage insurance premium (MIP) fee of 0.55% of the loan amount for the life of the loan.

While the FHA upfront fee and monthly MIP fee can be costly, FHA loans can be a good option for borrowers with a lower credit score or who cannot afford a large down payment.

Ultimately, borrowers should carefully consider all their options and work with their lenders to determine the best choice for their circumstances. The monthly fee can not be canceled.

Borrowers must pay guaranteed yearly fees as part of the USDA loan program. The annual charge, usually 0.35% of the loan balance, is payable annually for the loan duration. Twelve payments of the yearly fee are paid together with the monthly mortgage payment.

Overview of USDA Loans and PMI

USDA loans are home loans guaranteed by the U. S. Department of Agriculture and available to those who meet the USDA’s income and location requirements. These loans have no down payment or private mortgage insurance (PMI).

Instead of PMI, USDA loans have an annual fee of 1% of the loan's principal balance each year. This fee helps to insure the loan and can be included in the monthly loan payment.

Conventional loans require that borrowers pay for PMI if they cannot put down at least 20% of the home’s purchase price. The USDA guarantees these loans, making them an attractive option for those who cannot afford a conventional loan and its associated PMI fees.

USDA Direct Loans - No PMI

The USDA does not charge a guarantee or Annual fee on USDA Direct home loans.


In conclusion, using USDA loans is an excellent option to buy a house without paying PMI. The yearly guarantee fee charged by the USDA is a predetermined sum that may be included in a borrower's loan and does not need additional out-of-pocket expenses.

On the other hand, borrowers can get a loan with PMI but be unable to meet its requirements or unwilling to pay the extra fees that come with it. It is essential to properly examine each choice to decide which is best since eligibility criteria might differ.

USDA loans provide a terrific option to finance a house without the extra expenditures of PMI.