USDA loans are known for no-down-payment financing, but they are not fee-free. USDA Guaranteed Loans use a guarantee fee to help support the program and reduce lender risk.
The guarantee fee is different from private mortgage insurance, or PMI. PMI is insurance that protects a conventional mortgage lender if a borrower defaults. USDA does not use PMI. Instead, USDA Guaranteed Loans use an upfront guarantee fee and an annual fee.
The upfront guarantee fee is generally paid at closing or financed into the loan. The annual fee is divided into monthly payments and included in your mortgage payment.
USDA Loan Guarantee Fee Basics
| Fee Or Feature |
Amount |
How It Works |
| Upfront Guarantee Fee |
1% of the loan amount |
Paid at closing or often financed into the loan |
| Annual Fee |
0.35% of the unpaid principal balance |
Divided into monthly payments |
| Private Mortgage Insurance |
Not used |
USDA uses guarantee fees instead of PMI |
| Down Payment |
0% for eligible borrowers |
Closing costs and fees may still apply |
| Loan Term |
30-year fixed rate |
Rates are negotiated between the borrower and lender |
What The USDA Guarantee Fee Is
The USDA guarantee fee is a program fee for USDA Guaranteed Loans. It helps support USDA’s guarantee to approved lenders.
A guarantee means USDA agrees to cover part of the lender’s loss if an eligible loan defaults. In plain language, the guarantee reduces lender risk and helps make no-down-payment financing available to eligible borrowers.
USDA’s Guaranteed Loan Program flyer lists the upfront guarantee fee at 1%, the annual fee at 0.35% of the unpaid principal balance and the standard loan term as a 30-year fixed rate negotiated between the applicant and lender.
Why The USDA Guarantee Fee Exists
USDA Guaranteed Loans can allow 100% financing for eligible borrowers. That means the borrower may be able to finance the full purchase price without a down payment.
When a loan has no down payment, the borrower starts with less equity in the home. Equity is the difference between the home’s value and the loan balance. The USDA guarantee helps approved lenders offer this financing while managing the risk of default.
USDA says the Section 502 Guaranteed Loan Program helps approved lenders provide loans to eligible low- and moderate-income households so they can buy adequate, modest, decent, safe and sanitary homes as their primary residence in eligible rural areas.
USDA Upfront Guarantee Fee
The upfront guarantee fee is 1% of the loan amount. It is called “upfront” because it is charged when the loan is made.
For example, a $250,000 USDA loan would have a $2,500 upfront guarantee fee before any financing of that fee.
| Base Loan Amount |
Upfront Guarantee Fee Rate |
Upfront Guarantee Fee |
| $200,000 |
1% |
$2,000 |
| $250,000 |
1% |
$2,500 |
| $300,000 |
1% |
$3,000 |
| $350,000 |
1% |
$3,500 |
USDA lists the upfront guarantee fee as 1% in its current Guaranteed Loan Program flyer.
Can You Finance The USDA Upfront Guarantee Fee?
Many borrowers finance the upfront guarantee fee into the loan instead of paying it fully out of pocket at closing. Financing the fee means the fee is added to the loan balance and repaid over time.
Financing the upfront fee can reduce the amount of cash needed at closing. It also increases the loan balance, which can slightly increase the monthly payment and total interest paid over the life of the loan.
USDA’s annual fee user guide states that annual fees are based on the total loan amount, including any upfront guarantee fee financed in the loan.
Paying The Upfront Fee vs. Financing It
Paying the upfront guarantee fee at closing keeps the loan balance lower. Financing the fee keeps more cash available for moving costs, repairs, emergency savings and other post-closing expenses.
The better choice depends on your savings, monthly payment target and how long you expect to keep the loan.
| Option |
Main Benefit |
Tradeoff |
| Pay The Fee At Closing |
Lower loan balance |
More cash needed upfront |
| Finance The Fee |
Less cash needed at closing |
Higher loan balance and more interest over time |
USDA Annual Fee
The USDA annual fee is 0.35% of the unpaid principal balance. The unpaid principal balance is the amount of the loan that has not yet been repaid.
The annual fee is not usually paid once per year by the borrower. Instead, it is divided into monthly payments and included in the mortgage payment.
USDA’s Guaranteed Loan Program flyer lists the annual fee as 0.35% of the unpaid principal balance. (https://www.rd.usda.gov/sites/default/files/Guarantee_SFH_Flyer.pdf)
How The USDA Annual Fee Is Calculated
The basic annual fee calculation is the unpaid principal balance multiplied by 0.35%, then divided by 12 for the monthly amount.
For example, if the unpaid principal balance is $250,000, the annual fee at 0.35% is $875 for the year. Divided by 12, that equals about $72.92 per month.
| Unpaid Principal Balance |
Annual Fee Rate |
Estimated Annual Fee |
Estimated Monthly Amount |
| $200,000 |
0.35% |
$700 |
$58.33 |
| $250,000 |
0.35% |
$875 |
$72.92 |
| $300,000 |
0.35% |
$1,050 |
$87.50 |
| $350,000 |
0.35% |
$1,225 |
$102.08 |
USDA’s annual fee user guide explains that annual fees are calculated based on the average yearly scheduled unpaid principal balance, not the actual unpaid principal balance. This means the lender or servicer uses USDA’s required calculation method rather than a simple month-by-month recalculation by the borrower.
Does The USDA Annual Fee Go Away?
The USDA annual fee is generally part of the USDA Guaranteed Loan payment for as long as the loan remains active. It is not the same as conventional PMI, which can often be canceled after the borrower reaches enough equity and meets cancellation rules.
If a borrower later refinances out of the USDA loan into another loan type, the USDA annual fee would no longer apply to the new loan. Refinancing means replacing the existing mortgage with a new mortgage.
USDA Guarantee Fee Vs. PMI
USDA guarantee fees are not the same as private mortgage insurance on a conventional loan.
Private mortgage insurance, or PMI, is commonly required on conventional loans when the down payment is less than 20%. PMI protects the lender if the borrower defaults. USDA Guaranteed Loans do not use PMI. They use an upfront guarantee fee and an annual fee instead.
The main difference for borrowers is how the cost is structured. Conventional PMI may be cancelable when equity requirements are met. USDA uses a program fee structure tied to the guarantee.
USDA Guarantee Fee Vs. FHA Mortgage Insurance
USDA guarantee fees and FHA mortgage insurance are both program costs, but they differ in key ways.
FHA loans generally include an upfront mortgage insurance premium and an annual mortgage insurance premium. Mortgage insurance premium is the FHA term for its mortgage insurance cost.
USDA Guaranteed Loans use a 1% upfront guarantee fee and a 0.35% annual fee under the current fee structure. FHA mortgage insurance rates and cancellation rules depend on FHA program rules, loan term, loan amount and down payment.
USDA Guarantee Fee Vs. VA Funding Fee
USDA and VA loans both offer no-down-payment options for eligible borrowers, but the fee structures are different.
VA loans do not require monthly mortgage insurance. Many VA borrowers pay a VA funding fee unless they qualify for an exemption. The VA funding fee depends on factors such as the loan type, down payment amount and whether the borrower has used the VA loan benefit before.
The VA says that the funding fee is a one-time payment that helps lower the cost of the loan for U.S. taxpayers because the VA home loan program does not require down payments or monthly mortgage insurance.
How USDA Fees Compare With Other Low Down Payment Loans
USDA fees can be competitive with other low down payment loan options, but the best choice depends on eligibility, credit profile, property location and total monthly payment.
| Loan Type |
Common Upfront Cost |
Common Monthly Or Annual Cost |
Key Eligibility Factor |
| USDA |
Upfront guarantee fee |
Annual fee paid monthly |
Income and property location rules apply |
| FHA |
Upfront mortgage insurance premium |
Annual mortgage insurance premium paid monthly |
Credit, down payment and FHA property rules apply |
| Conventional |
No standard upfront PMI fee |
PMI often required with less than 20% down |
Credit, down payment and loan-to-value ratio affect cost |
| VA |
Funding fee for many borrowers |
No monthly PMI |
VA eligibility is required |
Loan-to-value ratio compares the loan amount with the home’s value. In plain language, it shows how much of the home is financed instead of paid upfront.
Who Qualifies For USDA Guaranteed Financing?
USDA Guaranteed Loans are for eligible low- and moderate-income borrowers buying in eligible rural areas. The home must be used as the borrower’s primary residence.
USDA says the program assists approved lenders in providing loans to low- and moderate-income households so they can own adequate, modest, decent, safe and sanitary dwellings as their primary residence in eligible rural areas. (https://www.rd.usda.gov/programs-services/single-family-housing-programs/single-family-housing-guaranteed-loan-program)
Eligibility generally depends on income, credit, debt-to-income ratio, property location and occupancy. Debt-to-income ratio compares monthly debt payments with gross monthly income. In plain language, it helps show whether the new mortgage payment is manageable.
USDA Income And Property Rules
USDA eligibility is not based only on the borrower’s credit or down payment. The household must meet program income rules, and the property must be in an eligible area.
Household income is used to determine whether the household meets USDA income limits. Repayment income is the income used to qualify for the mortgage payment. In plain language, household income affects program eligibility, while repayment income affects whether the borrower can afford the loan.
USDA’s program page states that applicants must meet income eligibility, agree to occupy the home as their primary residence and meet citizenship or eligible noncitizen requirements. (https://www.rd.usda.gov/programs-services/single-family-housing-programs/single-family-housing-guaranteed-loan-program)
USDA Guaranteed Loans Vs. USDA Direct Loans
USDA Guaranteed Loans and USDA Direct Loans are different programs.
USDA Guaranteed Loans are made by approved lenders and backed by USDA. These are the loans most borrowers mean when they discuss USDA mortgages from private lenders.
USDA Direct Loans are made directly by USDA and are generally designed for low- and very low-income applicants. They follow different rules, including different payment assistance and eligibility requirements.
USDA’s Direct Loan program page describes Section 502 Direct Loans as payment assistance for low- and very low-income applicants to obtain decent, safe and sanitary housing in eligible rural areas.
How To Budget For USDA Fees
To estimate the full cost of a USDA loan, look beyond the down payment. A no-down-payment loan can still include closing costs, prepaid expenses, the upfront guarantee fee and the annual fee.
Start by estimating:
- Purchase price
- Base loan amount
- Upfront guarantee fee
- Whether the upfront fee will be paid at closing or financed
- Annual fee paid monthly
- Property taxes
- Homeowners insurance
- Closing costs
- Prepaid expenses
Prepaid expenses are costs paid at closing for items that come due after closing, such as homeowners insurance, property taxes and prepaid interest.
Example USDA Payment Impact
The upfront guarantee fee and annual fee can both affect loan cost. The upfront fee affects cash to close or loan balance. The annual fee affects the monthly payment.
For a $250,000 loan amount, the 1% upfront guarantee fee would be $2,500. If financed, the loan balance would increase to $252,500 before other loan adjustments. The 0.35% annual fee on a $250,000 unpaid principal balance would be about $72.92 per month.
This example is simplified. Actual payments depend on the final loan amount, interest rate, taxes, insurance, fee financing, amortization schedule and USDA’s required annual fee calculation method.
Can The Seller Pay USDA Fees?
Seller credits may be allowed within USDA program limits. A seller credit is money the seller agrees to contribute toward the buyer’s allowed closing costs or prepaid expenses.
USDA’s Guaranteed Loan Program flyer states that seller or interested party contributions are allowable up to 6% of the sales price.
Seller credits must be documented and must follow USDA, lender and contract requirements. They generally cannot be used in a way that gives the borrower cash back beyond allowed limits.
Bottom Line
The USDA loan guarantee fee is the program cost that helps support no-down-payment USDA financing. The current USDA Guaranteed Loan structure includes a 1% upfront guarantee fee and a 0.35% annual fee paid monthly.
The upfront fee can often be financed, which may reduce cash needed at closing but increase the loan balance. The annual fee adds to the monthly payment. Borrowers should compare the full payment, cash to close and long-term cost before choosing a USDA loan.
Frequently Asked Questions
What Is The USDA Loan Guarantee Fee?
The USDA loan guarantee fee is a required program fee for USDA Guaranteed Loans. It helps support USDA’s guarantee to approved lenders and helps make no-down-payment financing available to eligible borrowers.
How Much Is The USDA Upfront Guarantee Fee?
The USDA upfront guarantee fee is 1% of the loan amount under the current Guaranteed Loan Program structure.
How Much Is The USDA Annual Fee?
The USDA annual fee is 0.35% of the unpaid principal balance under the current Guaranteed Loan Program structure. It is divided into monthly payments.
Does A USDA Loan Have PMI?
No. USDA Guaranteed Loans do not use private mortgage insurance. They use an upfront guarantee fee and an annual fee instead.
Can I Finance The USDA Upfront Guarantee Fee?
Often, yes. Many borrowers finance the upfront guarantee fee into the loan instead of paying it entirely out of pocket at closing. Financing the fee increases the loan balance.
Does The USDA Annual Fee Go Away?
The USDA annual fee generally remains part of the USDA loan payment while the loan is active. A borrower who later refinances into a different loan type would no longer pay the USDA annual fee on the new loan.
Are USDA Fees The Same For USDA Direct Loans?
No. USDA Guaranteed Loans and USDA Direct Loans are different programs. USDA Direct Loans are made directly by USDA and follow different eligibility and payment assistance rules.
Can Seller Credits Help Pay USDA Closing Costs?
Yes, seller credits may help pay eligible closing costs and prepaid expenses if they meet USDA and lender rules. USDA’s Guaranteed Loan Program flyer says seller or interested party contributions are allowed up to 6% of the sales price.
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