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USDA Announces Plans to Decrease Fees on its $0 Down Loan Program

Shawn Von Talge



05-05-2016

For those of you in rural areas who are looking to purchase a home this fall, USDA recently made an exciting announcement regarding its $0 down mortgage program. To explain, for the last several years USDA has been steadily increasing the fees it charges borrowers to participate in its highly popular $0 loan program. These fees consist of a one-time upfront “guarantee” fee and an ongoing monthly “servicing” fee. On April 28th USDA announced that they would actually be lowering these fees for the upcoming fiscal year, which (for them) starts on October 1st, 2016. Beginning with all conditional commitments issued on this date, the upfront guarantee fee will decrease from the current rate of 2.75% of the loan amount to 1.0% of the loan amount. The monthly servicing fee—which is currently assessed at 0.50% of the average scheduled unpaid principle balance on the loan—will decrease to 0.35%.

So what do these fee decreases mean for the typical homebuyer? To answer this question let’s see what the USDA fees would currently be on a $135,000 home purchase versus what they’ll be starting October 1st. Under the current USDA fee structure the upfront guarantee fee would equate to $3,817.48, resulting in a total financed loan amount of $138,817.48. The servicing fee during the first year of repayment would come out to $57.34 per month. If we utilize the current interest rate on a 30-year USDA loan (3.500%) and the fee structure outlined above, the principal, interest, and monthly servicing fee payment would add up to $680.69 per month.

Now let’s use the same example above and assume the fee structure that will take effect October 1st of this year. The guarantee fee would decrease to $1,363.63, resulting in a total financed loan amount of $136,363 and a savings of $2,454 over the current upfront fee. The servicing fee for the first year would decrease to $39.43 per month, which represents a total savings of approximately $215 during the first year of repayment. If we utilize the current rate on a 30-year USDA loan (3.500%) along with the new fee structure, the principal, interest, and monthly servicing fee payment becomes $651.76 per month, which represents a monthly savings of $28.93 over USDA’s current fee structure.

In addition to the monthly savings brought about by the lower USDA fee structure, another way of looking at it is the increased purchasing power it will mean for homebuyers. In our example, under USDA’s current fee structure, a home purchase of $135,000 translates into a principle, interest, and servicing fee payment of $680.69 per month. Under USDA’s new fee structure, this same monthly payment could be achieved on a $141,000 home loan. In other words, the new fee structure results in an increase of $6,000 in purchasing power for the homebuyer in our example.

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