USDA Guarantee Fee and Annual Fee Explained

USDA Guaranteed loans do not use conventional private mortgage insurance, but they are not free of mortgage-insurance-like costs.

The program charges an upfront guarantee fee and an annual fee. The upfront fee affects the loan balance or cash due at closing. The annual fee is calculated each year and is generally collected monthly with the mortgage payment.

For current fiscal-year loans, USDA has continued the familiar 1 percent upfront fee and 0.35 percent annual fee. Fees can change, so the lender must use the percentages tied to the applicable USDA Conditional Commitment.

Why USDA charges the fees

USDA provides a guarantee to approved lenders, reducing the lender’s loss exposure if a borrower defaults and the collateral does not cover the debt.

The fees help support the Guaranteed Loan Program. They are not interest paid to the lender and do not build borrower equity.

How the upfront guarantee fee works

The upfront fee is a percentage of the guaranteed loan amount under the current calculation.

It may generally be:

• Financed into the loan
• Partially financed and partially paid
• Paid in full at closing
• Paid by an eligible seller contribution or other permitted source

Most buyers finance it because USDA permits the total loan to include the fee above the otherwise supported base amount.

A simple upfront-fee example

Assume the supported base loan is $250,000 and the applicable upfront fee is 1 percent.

The fee is $2,500. If fully financed, the total loan becomes approximately $252,500, subject to the lender’s exact calculation and rounding.

The borrower does not receive the $2,500 as cash. It is added to the mortgage balance and remitted as required for the guarantee.

Financing the fee increases long-term cost

Financing protects cash at closing, but the borrower pays interest on the financed amount for as long as it remains in the loan.

Paying it at closing reduces the balance but requires more cash. The better choice depends on available savings, the rest of the closing costs, and the household’s need for reserves.

Do not empty an emergency fund solely to avoid financing a relatively small portion of the mortgage.

How the annual fee works

The annual fee is based on the unpaid principal balance and the applicable annual percentage stated for the loan.

Although it is called annual, servicers generally collect it in monthly installments as part of the regular payment.

The annual amount declines over time as the principal balance falls, assuming the loan amortizes normally. The monthly charge may therefore decrease gradually, but taxes and insurance can move in the opposite direction.

An annual-fee example

If the relevant unpaid principal balance is about $250,000 and the annual fee is 0.35 percent, the annual amount is about $875, or roughly $72.92 a month before later balance changes and the servicer’s exact calculation.

The example is educational, not a quote. The lender and servicer calculate the actual fee from the loan records and applicable schedule.

The annual fee generally lasts for the loan

USDA’s annual fee is not automatically removed when the borrower reaches 20 percent equity.

That is different from borrower-paid conventional mortgage insurance, which may have cancellation rights under federal law and loan terms.

The USDA annual fee generally continues while the USDA Guaranteed loan remains outstanding. A borrower may eliminate it by paying off or refinancing the loan, but a refinance should be judged by the complete costs and new terms.

The fee percentage is tied to the commitment

USDA can announce different fees for a new fiscal year. The applicable percentages are generally determined by the date USDA issues the Conditional Commitment, not simply the application date or closing date.

A loan that crosses a fiscal-year boundary may need careful timing and confirmation from the lender.

Once the loan closes, the annual-fee percentage stated for that loan does not normally reset every year because USDA announces a new percentage for new loans.

Refunds are limited

The upfront guarantee fee is generally nonrefundable after USDA issues the Loan Note Guarantee.

Refinancing later does not typically produce a prorated refund of the original upfront fee.

If a fee was charged because of an error, the lender and USDA should review the specific facts. Borrowers should not assume there is a routine refund similar to an unused insurance premium.

How fees affect APR and comparisons

The upfront fee and annual fee affect the cost of USDA financing even when the note rate looks competitive.

Compare USDA with FHA and conventional financing using:

• Loan amount after financed fees
• Note rate and annual percentage rate
• Monthly principal and interest
• Monthly annual-fee or mortgage-insurance charge
• Cash to close
• How long the mortgage-insurance-related charge lasts
• Expected time in the home and loan

Read USDA versus FHA and conventional loans for a broader comparison.

Do not compare only the payment

A lower monthly payment can come from a lower rate, lower loan amount, longer term, lower taxes, or a different mortgage-insurance structure.

Ask for complete Loan Estimates using the same purchase price, down payment, lock period, and credit assumptions.

The Loan Under Review mortgage calculators can help you test payment changes, but the official lender disclosures control the transaction.

What to ask your lender

• What upfront and annual fee percentages apply to this loan?
• Which Conditional Commitment date controls the fees?
• How much of the upfront fee is being financed?
• What is the total loan after the fee?
• What annual-fee amount is included in the current payment?
• Does the annual fee remain for the life of this USDA loan?
• How do the APR and cash to close compare with FHA and conventional options?
• Would paying part of the upfront fee materially improve the long-term cost?

Frequently asked questions

Is the USDA guarantee fee the same as PMI?

No. It is a program guarantee fee paid under USDA rules. It serves a similar risk-management purpose but follows a different structure and cancellation treatment.

Can the upfront fee be financed?

Yes, it may generally be financed in full or in part under current guidance.

Does the annual fee disappear at 20 percent equity?

No automatic equity-based cancellation generally applies to the USDA annual fee.

Can the seller pay the upfront fee?

An eligible seller contribution may be used toward the fee within current contribution and closing-cost rules.

Can USDA change the fees?

Yes. USDA may announce fee changes for new commitments. Confirm the current fiscal-year schedule with the lender.

USDA’s fees are often modest compared with other low-down-payment mortgage-insurance structures, but they still belong in the comparison. Look at the financed balance, monthly charge, APR, and likely time in the loan instead of treating zero down as zero cost.

Official Sources and Further Reading

• USDA Upfront Guarantee Fee and Annual Fee Training
• USDA Upfront Guarantee Fee and Annual Fee Module
• USDA Single Family Housing Guaranteed Loan Program
• 7 CFR Part 3555

This article is general mortgage education. Loan Under Review is not a lender and does not provide financial, legal, lending, or appraisal advice. Program rules and lender requirements can change, and lenders may apply additional requirements.