If you’re exploring a USDA home loan, you may hear the term “USDA guarantee fee” and wonder what it means and how much it will cost you. While USDA loans are known for no down payment and competitive interest rates, they do include a guarantee fee that helps keep the program affordable and available.
Let’s break it down in simple terms.
What Is the USDA Guarantee Fee?
The USDA guarantee fee is a fee charged by the U.S. Department of Agriculture on USDA Guaranteed Loans. It helps fund the USDA loan program and protects lenders in case a borrower defaults on the loan.
Think of it as the USDA version of mortgage insurance. Instead of protecting you, it protects the lender, which is why lenders are able to offer favorable terms like zero down payment.
Are There Two USDA Guarantee Fees?
Yes. USDA loans have two separate fees:
- Upfront Guarantee Fee
- Currently 1% of the loan amount
- Can be paid at closing or rolled into the loan
- One-time fee
Example:
If your loan amount is $250,000, the upfront guarantee fee would be $2,500.
Most buyers choose to roll this fee into the loan, so they don’t have to pay it out of pocket at closing.
- Annual (Ongoing) Guarantee Fee
- Currently 0.35% of the remaining loan balance
- Paid monthly as part of your mortgage payment
- Decreases slightly each year as your loan balance goes down
This fee is similar to monthly mortgage insurance and is automatically included in your payment, so you do not pay it separately.
How Is the USDA Guarantee Fee Paid?
Here’s how most borrowers handle it:
- Upfront fee:
– Rolled into the loan (most common)
– Or paid at closing if preferred - Annual fee:
– Paid monthly
– Included in your mortgage payment
There’s no separate bill or extra step required; your lender handles the calculation and payment.
Can the USDA Guarantee Fee Be Removed?
Unlike FHA mortgage insurance, the USDA annual guarantee fee typically remains for the life of the loan. However, borrowers may later refinance into another loan type if they qualify and want to eliminate the fee.
Why USDA Loans Still Make Sense (Even With the Fee)
USDA loans are backed by the federal government, which means the U.S. Department of Agriculture guarantees a portion of each loan. This guarantee reduces the risk for lenders and helps make favorable loan terms possible, even though borrowers pay a USDA guarantee fee.
While the loan is government-backed, you don’t borrow directly from the USDA. Instead, you apply through a USDA-approved lender, like Homestead Financial Mortgage, which handles the loan process from start to finish.
Because of this structure, USDA loans often remain one of the most affordable home loan options available, especially for eligible buyers. Key benefits include:
- No down payment required, making homeownership more accessible
- Competitive interest rates, often lower than many Conventional loans
- Reduced upfront costs, even when the guarantee fee is included
- Flexible credit guidelines, which can help more buyers qualify
USDA loans are specifically designed to support rural and eligible suburban communities. To qualify, the home must be located in a USDA-approved area, typically with a population of 35,000 or fewer. This focus on smaller communities is what sets USDA loans apart from other government-backed options like FHA or VA loans.
For many buyers, particularly first-time homebuyers or those purchasing in eligible areas, the overall monthly payment can still be lower than other loan programs, even after accounting for the guarantee fee.
If you’re unsure whether a home qualifies, the USDA provides an official Property Eligibility Map where you can search by address or ZIP code to confirm eligibility.
Final Thoughts
The USDA guarantee fee helps make the USDA loan program possible. And for many buyers, it’s a small trade-off for the benefits of zero down payment and affordable financing.
If you’re considering a USDA loan, our loan advisors can help you understand how the guarantee fee impacts your specific loan amount and monthly payment.
