The USDA Guarantee Fee Explained
The term “loan guarantee” for those not affiliated with the mortgage industry really does sound like someone is guaranteed a mortgage, regardless of income, employment or credit. But that’s really not how the guarantee is applied. There are three government-backed mortgages in the industry and they are the VA, FHA and USDA loan programs. Each comes with some form of guarantee, not to the applicant, but to the lender. The guarantee is, in essence, an insurance policy and homebuyers who use a loan with a guaranteed pay for the premiums.
With VA loans, there is only one such premium and it is rolled into the loan amount. FHA loans have two such premiums, an initial, upfront premium rolled into the final loan amount and an annual premium that is paid for in monthly installments for the life of the loan. USDA loans have a guarantee and also have two premiums, an upfront fee and an annual premium. The upfront fee is rolled into the loan amount and the annual fee is paid in monthly installments.
USDA loan guarantee fees, appropriate named “Guarantee Fee” are the lowest of the three government-backed mortgages. The initial fee is just 1.00 percent of the sales price of the home and rolled into the loan and the annual fee is just 0.35 percent of the outstanding loan balance. Compared to a VA guarantee fee of 2.15 percent of the loan amount, the initial fee is lower although the VA program doesn’t carry an annual premium paid in monthly installments.
When comparing guarantee fees with conventional loans, they’re also very competitive. Conventional loans ask for a private mortgage insurance policy for loan balances exceeding 80 percent of the value of the property. These policy prices can also vary based upon the type of the loan, credit scores and equity in the initial purchase.
The guarantee fee funds an insurance policy that compensates the lender for the loss occurring as the result of a foreclosure. These loan guarantees also make lenders a little more amiable to issue a loan with zero down payment and relatively low credit scores. As long as the lender approved a loan application using proper guidelines the guarantee will be in place. When someone makes a mortgage payment more than 30 days past the due date, not only will credit scores fall but that can get them one step closer to losing the home, but the lender won’t foreclose on just one such late payment. If that same payment is made more than 60 days late, the lender can file an official Notice of Default. After 90 days, the lender can then move to foreclose.
But a lender filing a foreclosure does not mean the borrowers lose the home. Initially, it’s protection for the lender. The last thing a lender wants to do is foreclose on a property. The lender wants the interest, not the home. Even after a foreclosure notice is filed the lender works with borrowers to figure out a repayment plan or a modification. The lender would rather work something out rather than proceed with an expensive foreclosure. If the lender does move forward, the guarantee fee is there to issue compensation to the lender.
Written by David Reed for www.RealtyTimes.com Copyright © 2019 Realty Times All Rights Reserved. Reed is from Austin, Texas and is the author of The Real Estate Investor’s Guide to Financing, Your Guide to VA Loans and Decoding the New Mortgage Market. As a Senior Loan Officer and Mortgage Executive he closed more than 2,000 mortgage loans over the course of more than 20 years in commercial and residential mortgage lending. He has appeared on CNN, CNBC, Fox Business, Fox and Friends and the Today In New York show.