Government guaranteed mortgages that require no down payments are becoming increasingly expensive top borrowers due to fees that are designed to make the program revenue-neutral in the federal budget.
Earlier this year, for the first time, USDA imposed an upfront guarantee fee of 3.5 percent of the loan balance, which made USDA loans virtually as expensive as FHA loans to borrowers with better credit, which require a 3.5 percent down payment.
As of October 1, the upfront fee was reduced from 3.5 percent to 2 percent, however a new annual fee of .3 percent was introduced. It will be assessed on the unpaid principal loan balance every year.
Long touted as a better deal for borrowers than FHA loans, the new fees make USDA loans competitive with FHA over the life of the loan. For a $100.000 mortgage at 5 percent over 30 years, a borrower will pay a $2000 upfront guarantee fee plus a total of $5653.02 in annual fees over the life of the loan. An identical FHA loan requires a $3500 down payment (or more) plus a mortgage insurance premium of 1 percent on the balance for at least five years until the loan to value ratio reaches 78 percent.
Founded in 1949 to spur home sales and development in rural areas, the US Department of Agriculture’s popular direct and guaranteed rural housing loans today are one of the few places in America you can still get a mortgage with no money down at competitive rates.
Borrowers don’t have to be lower income; in fact they can make slightly more than the median. To qualify for the government guaranteed loans, borrowers can earn up to 115 percent of the median income for the area. Nor do they have to buy in rural area. They can live relatively close to a major urban area or in a popular resort community, however qualifying areas were recently redrawn to comply with the program’s rural mandate.