A USDA loan is a home loan backed by the U.S. Department of Agriculture as part of its Rural Development Guaranteed Housing Loan program.
“Backing” a mortgage means insuring the lender. If a USDA loan borrower defaults, then USDA will protect the lender from taking huge losses on the loan.
With this kind of insurance behind a borrower, lenders can offer competitive loan rates while requiring no down payment. This helps fulfill USDA’s goal of increasing homeownership for lower-income buyers in rural areas.
To help fund the USDA loan program, borrowers pay for mortgage insurance. This comes in two separate parts:
– USDA guarantee fee — 1% of the loan amount. This fee is technically due at closing but most borrowers finance it into the loan amount instead
– USDA annual fees — 0.35% of the loan amount due each year. This fee is divided into 12 installments and collected as part of the loan’s monthly payments