What Is a USDA Guarantee Fee?

The U.S. Department of Agriculture (USDA) requires a fee on all USDA loans they guarantee from banks and other lenders. The guarantee fee helps approved lenders provide low- to moderate-income earners financing to buy, build, rehabilitate, or relocate a home in a rural area. Similarly to mortgage insurance, the USDA guarantee reduces the risk to the lender, so they can finance 100% of the loan. This means you can receive financing with no down payment, competitive interest rates, and flexible credit requirements. 

What is the USDA Guaranteed Loan program?

The USDA Guaranteed Loan program is a mortgage option offered by the USDA to help low- to moderate-income borrowers purchase homes in eligible rural and suburban areas. Also known as the Single Family Housing Guaranteed Loan program, it provides government-backed guarantees to approved lenders, allowing them to offer 100% financing with no down payment minimum. The guarantee reduces the lender’s risk, which typically results in better terms for qualified borrowers. 

The USDA Guaranteed Loan program is designed to promote homeownership in rural communities by offering competitive interest rates, flexible credit requirements, and the ability to finance closing costs into the loan. Eligible properties must be located within USDA-designated rural areas. This includes suburban areas on the outskirts of many cities, which means borrowers don’t have to live miles away from the population to take advantage of one of these loans. In addition to supporting rural development, this program aims to ensure that individuals and families can find affordable housing when securing a conventional loan isn’t an option.

What is a USDA funding fee?

The USDA funding fee, or guarantee fee, is the cost of receiving the loan note guarantee. The fee is a combination of an upfront fee and an annual premium cost. The USDA periodically updates USDA fees. As of 2024, here are the USDA funding fee costs: 

Upfront USDA fee

The upfront USDA guarantee fee typically costs 1% of the loan amount. Say you have a $350,000 USDA loan, you’ll pay $3,500 upfront. The upfront fee can be rolled into the loan, which means it would become part of your principal balance, or you can choose to pay it along with your other closing costs. 

USDA annual fee 

The annual USDA loan fee is financed into your home loan, becoming part of your monthly mortgage payments. The annual fee is typically 0.35% of your principal loan balance, divided into monthly payments over your loan duration. The annual fee is then recalculated every 12 months based on the updated balance of the outstanding loan. A $350,000 USDA loan with a 30-year term has an annual fee of $1,225 or $102 each month.

How to qualify for a USDA-guaranteed loan

To qualify for a USDA-guaranteed loan with no down payment, you must meet the following requirements:

• Income eligibility: You must have a stable and consistent income, and your household income must not exceed 115% of the area’s median income (AMI).
• Credit score: A minimum credit score of 640 is preferred for USDA loans, but lenders will consider the strength of your other financial factors when determining your eligibility if you have a lower credit score.
• Debt-to-income ratio (DTI): Lenders also prefer your debt-to-income ratio does not exceed 41% but may consider up to 45% with compensating financial factors.
• Citizenship: You must have a U.S. citizenship or permanent residency
• Property location: The property you intend to purchase must be in a USDA-eligible rural or suburban area.
• Intent of use: The property must be your primary residence

Is it possible to avoid the USDA guarantee fee?

Avoiding the USDA guarantee isn’t possible. The fee is what enables the USDA to offer the guaranteed loan program. There are ways you can minimize the additional financial expense.

Negotiate with the seller

When making your offer on a house, you can ask the seller if they’re willing to pay the upfront guarantee fee or other closing costs. This is known as seller concessions, and it’s often a good negotiation strategy for buyers who have the advantage of making a strong offer, are buying in a less competitive market, or are buying a home that needs considerable repairs.

Seek down payment assistance

Down payment assistance comes in grants, forgivable loans, deferred loans, down payment matching, and more. Despite the name, it can also be used towards closing costs and your upfront guarantee fee. Down payment assistance programs vary by location, so you’ll want to check with your local municipality, lender, and banks to see what’s available.

Compare your loan options

USDA loans are not the only option for low- and moderate-income homebuyers. Both conventional and FHA loans offer low down payment programs with affordable terms. If you’re a service member or veteran, you can take out a VA loan, which also doesn’t require a down payment. Consider all your loan options and compare the long-term costs before choosing a mortgage program.

While the USDA guarantee fee is an additional cost, the funding fee is typically less than conventional and FHA mortgage insurance — which most first-time homebuyers typically need to qualify for a mortgage. Find a mortgage lender near you to learn more about your USDA loan options.