USDA Guaranteed Loans - "No PMI" No More!

By
Mortgage and Lending with Consumer First Mortgage

 


USDA Rural Development LoansUSDA Rural Development has long been the 100% financing leader for a lot of areas across the nation.  One of the major benefits of this loan product was that it required no monthly escrows for an annual mortgage insurance (MI).  MI is sometimes referred as PMI, and the loan is advertised many times as 100% Financing with No PMI.  That’s all going to change come October 1, 2011.

USDA issued Administrative Notice 4551 on February 24, 2011 that alluded to this upcoming change.  The change has been confirmed in an email that also included instructions on how to calculate the fee.

Following in the footsteps of what the Federal Housing Administration (FHA) did back in October of 2010, USDA will be lowering the up-front guarantee fee. FHA lowered their fee from 2.25% to 1%.  USDA will be lowering their up-front guarantee fee from 3.5% back down to the 2%.  That’s a nice change! Click here to read my post about FHA making a similar change.

THE BIG CHANGE!

However, the other change is that it will now require a 0.3% annual mortgage insurance fee.  While this fee is an annual fee, it is collected monthly in escrow like most mortgage insurance payments.  In it’s basic form, on a $100,000 loan the calculation would be like this:


100,000 X 0.3% = $300 annual fee  

$300 annual fee / 12 mo = $25/mo

Here’s a look at an example of a $100,000 of how it is currently and how it will change come October 1, 2011.  Keep reading below for a look at the comparison of how a loan will look now vs. after Oct 1, 2011.

USDA adds monthly MI to loan for the life of the loanHere’s another major difference between USDA’s annual MI premium and most other premiums.  USDA’s annual MI premium will be assessed the entire life of the loan.  Mortgage insurance on both conventional and FHA loans is scheduled to cancel when the loan balance reaches 78% of the original purchase price.  For an FHA loan with a 3.5% down payment, this is sometime between year 12 and 13.  Compare that with USDA’s premium that could last the entire 30 years!

Here is a look at how it will affect borrower's come October 1, 2011.

Assumptions: $100,000 purchase price with $0 down payment.  5% 30 year Fixed Rate.  No monthly escrows for property taxes, homeowner’s insurance and/or HOA’s are included.
NOTE:  Before someone picks apart my calculation of the guarantee fee, and total loan amount, and annual MI calculations, this is simplified just to show the basic differences.



Current - Sep 30, 2011

On or after Oct 1, 2011

Up-front Guarantee fee = 3.5%
Annual MI = 0%


$100,000 base loan x 3.5% fee

Total Loan Amt = $103,500


P&I Pmt = $555.61



Total Payment:

$555.61



Total Fees collected by USDA:
~$3500


Up-front Guarantee fee = 2.0%
Annual MI = 0.3%


$100,000 base loan x 2.0% fee

Total Loan Amt = $102,000


P&I Pmt = $547.56
New MI pmt = $25


Total Payment:
$572.56


Total Fees collected by USDA:
$2000 + ~$6300 in annual premiums
~$8300!


It’s fairly clear that USDA Rural Development is hopefully taking strides to make itself self-sufficient where it doesn’t have to rely on funding from the federal government each year.  October 1, 2011 will begin a new fiscal year.  

This change will affect any new USDA loans where the conditional commitment is issued on or after October 1, 2011.  


 

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Re-Blogged 1 time:

Re-Blogged By Re-Blogged At
  1. Brendan C. Fontaine 09/22/2011 06:44 PM
Topic:
Lending / Financial
Groups:
All About Mortgages/Mortgage Networking
Mortgages
Realtors®
Tags:
usda
rural housing
100 financing
pmi
mip upfront mip
fha
down payment assistance

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Show All Comments
Rainer
37,610
Amy Sharrow
Mountain Top Producers - Running Springs, CA

We are just entering into our first escrow with a USDA loan.  I have learned so much about the benefits of this program to buyers in our area but I had not heard this.

Thanks for sharing the pertinent info!

March 02, 2011 11:37 PM #1
Rainer
157,547
Michael Kitsch
Coldwell Banker - Katy, TX
Wow! That was eye opening (I suggested you). Have a great month.
March 02, 2011 11:40 PM #2
Rainer
48,327
Teresa Fiveash, ABR
Keller Williams Realty - Memphis, TN

Thanks for breaking it down for us...I had received a memo about this tonight.  We do alot of USDA loans in our area.  It is a great program.  On another note - any idea when USDA direct may get funds from Congress?  I realize you don't do the direct loans, but wondered if you'd heard anything, especially with a shutdown pending?  We're on our 3rd extension right now, with no end in sight!

March 02, 2011 11:59 PM #3
Rainer
41,090
Brandon Snider
Consumer First Mortgage - Cullman, AL

@Amy - This is still going to be a great program, but like most programs have seen over the past couple of years...most of the cost is being passed onto the consumer.  Keep in mind, the only other true 100% program available right now is a VA loan.

@Cheryl - Thanks!

@Teresa - I haven't heard anything specific related to the Direct loans.  I know even under normal circumstances they can take 60 days on average.  Luckily, the government passed some legislation today to avoid a shutdown.  Unless the consumer just won't qualify for a Guaranteed Loan, you might consider having he or she change to that type of loan and have an experienced lender get it closed quickly for you.

March 03, 2011 12:37 AM #4
Rainmaker
317,306
David Krichmar
www.DaveYourMortgageGuy.com, FHA, VA, USDA, HomePath, Jumbo - Sugar Land, TX
DaveYourMortgageguy.com

Thanks Brandon for the Info. 

March 10, 2011 12:17 PM #5
Rainmaker
85,414
Amy Gerrish
Homesmart - San Tan Valley, AZ
Realtor - Phoenix, San Tan Valley

Great info!! Thanks so much. It's always hard to stay up on this stuff!

June 09, 2011 12:41 PM #6
Rainer
41,090
Brandon Snider
Consumer First Mortgage - Cullman, AL

You're welcome Amy!

June 09, 2011 12:45 PM #7
Rainer
9,841
Brendan C. Fontaine
Reliant Mortgage Company - Auburn, Maine - Auburn, ME

Awesome Post!

September 22, 2011 06:21 PM #8
Rainer
41,090
Brandon Snider
Consumer First Mortgage - Cullman, AL

Thanks Brendan.  Feel free to re-blog.

September 22, 2011 10:24 PM #9
Rainer
44,597
Kimberly F. McCanna
Prudential Homesale Services Group - Elizabethtown, PA

I haven't done a USDA since last year, thanks for posting this info, & putting it in black & white!

July 10, 2012 06:44 AM #10
Anonymous
Anonymous
miranda

Are you able to remove this pmi after so many years with a USDA loan ?

May 11, 2013 01:44 PM #11
Rainer
41,090
Brandon Snider
Consumer First Mortgage - Cullman, AL

Miranda,

No, this mortgage insurance is on your loan for the life of the loan.  This doesn't make it a bad option, because realative to other programs, the mortgage insurance is fairly inexpensive.  For example, for a $100,000 loan amount, the mortgage insurance on a USDA loan would be $33.33/mo.  For an FHA loan at the same $100,000 loan amount, the mortgage insurance would be $112.50/mo (assuming you put <5% down).  And after June 3, 2013, FHA loans will require this mortgage insurance for the life of the loan as well.


The only way to truly remove the mortgage insurance would be to refinance the loan to a conventional loan once you had 20% equity in the property.

Hope this helps.

May 13, 2013 06:18 AM #12
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Rainer
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Brandon Snider

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