For those looking to buy a home, the U.S. Department of Agriculture has reduced certain fees for its guaranteed loans, making mortgage financing even more accessible and affordable.
Effective October 1st, homebuyers as well as those looking to refinance will pay lesser fees associated with a Section 502 Guaranteed Loan. Specifically:
- A new up-front guarantee fee of 1.0% from the current 2.75%, of the total loan amount.
- A new annual fee of 0.35% from the current 0.50% for the loan’s unpaid principal balance.
To take advantage of these fees, your loan must be obligated in fiscal year 2017 that will begin on October 1, 2016, and will end on September 30, 2017.
By obligated, it means the USDA has approved the loan application package and has issued a Conditional Commitment for Single Family Housing Loan Guarantee to the lender.
New VS Current Guarantee Fee
As a borrower, you have the option to finance the guarantee fee in whole or in part into your loan. Or, you can choose not to finance and pay the entire fee out of pocket, using personal funds, eligible gift assistance, or seller concessions.
Let’s see the costs between the current 2.75% guarantee fee and the new 1.0% guarantee fee with $100,000 as a base loan amount.
|Guarantee Fee||Guarantee Fee Financed||Guarantee Fee Paid out of Pocket|
Annual Fee – 0.35% vs 0.50%
This amount is paid on an annual basis by the lender, which may pass on this fee to the borrower as part of his/her monthly mortgage payments.
The current annual fee of 0.50% on a $100,000 loan results to approximately $42 per month, added to your monthly payment. [That is, 0.50% or 0.0050 / 12 = 0.0004167 x $100,000 = $41.67.]
In comparison, this new annual fee of 0.35%, which will yield roughly $30 a month for the same loan amount. [So, 0.35% or 0.0035 / 12 = 0.0002917 x $100,000 = $29.17.]
Do you qualify for a USDA Guaranteed Loan?
USDA’s Rural Development Single Family Housing Guaranteed Loan Program (SFHGLP) or Guaranteed Rural Housing (GRH) Loan program offers 0% down payment and 100% financing for low- to moderate-income rural residents to own “adequate, modest, decent, safe and sanitary” homes.
The USDA’s Rural Housing Service guarantees the loan to be made by an approved commercial lender. This guarantee enables lenders to extend financing to households who normally can’t qualify for conventional loans.
Eligibility for a Section 502 Guaranteed Loan depends on your area, income, and credit, among other things. You can check with a lender to see if you qualify for this type of loan and find out how you can increase your eligibility chances. Get started here.
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.