Typically any mortgage with less than a 20% down payment will require a form of Mortgage Insurance (MI). MI protects investors in case a homeowner defaults on their mortgage. Since USDA Rural Housing loans need no down payment, MI is required. Because the USDA Rural Housing loans are government-backed, the MI rates are usually lower than comparable FHA and Conventional loans because lenders have more protection. This is important because lower monthly MI fees help keep buyers’ monthly mortgage payments lower. USDA Rural Housing loans are committed to making homeownership possible for lower-income families nationwide and low rates mean lower, affordable mortgage payments.
The USDA lowered its MI rates in October 2016. Currently, there is a 1% upfront fee paid at closing for purchases and refinances and a .35% annual fee for all loans, based on remaining principal. The upfront MI fees are not paid as cash but are instead financed into the loan so they can be paid out monthly. In contrast to USDA Rural Housing MI rates, FHA has a 1.75% upfront fee and .85% annually. Even Conventional loans average above a 1% annual fee. The USDA rates are usually lower than other loan programs’ MIs.
USDA Rural Housing mortgage rates are also usually lower than other loan programs. Mortgage rates are based on mortgage-backed security bonds, so a borrower can’t choose their rate. It is set for them depending on what the going rates are at the time of the home purchase. USDA Rural Housing rates are guaranteed by the U.S. Department of Agriculture so there is less risk than FHA and Conventional loans. This allows for lower rates. The only comparably lower mortgage rate is available through the Department of Veteran Affairs, and because only veterans are eligible, the USDA Rural Housing loan is more widely available to potential homebuyers.
The USDA Rural Housing loan’s rates are nationally-monitored and mandated, so regardless of a homebuyer’s geographical location, their rates will all be the same and as low as possible. Despite being called the “rural housing loan,” 97% of the US is USDA Rural Housing-eligible. The USDA’s website allows anyone to enter a desired home address to determine whether or not it is in an eligible area. Unless the home is in a metropolis or other densely populated city, it will likely fall in a rural area. The only factor in acquiring a USDA Rural Housing loan that may be disqualifying for some potential borrowers is exceeding income limits. The USDA Rural Housing program is targeted toward making homeownership possible for lower-income and rural families, so families making a certain amount of money will not qualify. Each state has different income guidelines based on household size and location.