In a nutshell, the U.S. Department of Agriculture’s single-family housing program offers mortgages to borrowers in rural areas with limited incomes.
The Section 502 Guaranteed Rural Housing Loan Program allows homeowners to borrow up to 100% LTV so long as their income doesn’t exceed 115% of the adjusted area median income (AMI).
However, because the loans are clearly high-risk by nature, the USDA charges a 2% upfront guarantee fee, similar to how the FHA charges an upfront mortgage insurance premium.
This fee is typically rolled into the USDA loan, so a borrower who purchases a $200,000 home will wind up with a $204,080 loan amount.
As a result, the monthly mortgage payment will be higher, though not by a necessarily significant amount.
But in order to keep the program alive, it seems this guarantee fee will need to be increased.
USDA Guarantee Fee to Climb to 2.75%
Come October 1st, the upfront fee for USDA home loans will rise to 2.75% from 2%, per Bloomberg.
The publication cited an e-mail from USDA spokesman David Sandretti, who claimed the fee increase would allow the program to “sustain itself without a congressional appropriation to offset credit-related costs.”
So that same $204,080 loan amount will increase to $205,655, which obviously makes it more expensive.
The good news is the monthly payment on a 30-year fixed-rate mortgage with an interest rate of 4% would only be about $7 higher based on that change.
A mere eighth of a percent increase in mortgage rate would actually be more damaging.
For the record, the USDA also charges an annual fee of 0.5% for the life of the loan.
This isn’t the first time the agency has changed its fee structure. There was a time when the upfront guarantee was 3.5%, but there wasn’t an annual fee.
The annual fee has also increased from 0.3% to 0.4%, and now stands at 0.5%.
Thankfully these fee increases aren’t substantial enough to hurt many homeowners, let alone have any of them even notice.
The USDA home loan program came under fire a couple years ago when it was alleged that loans were made to millionaires, on second homes, and in urban areas. The agency disputed those claims.
It was also temporarily halted in 2010 after the USDA ran out of money, which eventually led to the higher guarantee fees.
Since 2009, the USDA has invested more than $117 billion to support rural homeownership.
Last year, more than $19.9 billion was invested to help 140,000 rural families purchase and maintain homes.
If you want lower fees, get going before October 1st.