USDA Mortgage Insurance
Many Buyers get confused with all the terminology referring to mortgage insurance these days. There are many types and the differences can be hard to spot.
As many know, LTV (loan-to-value) is a key term in buying a home. This is the ratio of the loan amount to the purchase price for a purchase and the ratio of the loan amount to the appraised value in a refinance. This is important to the lender because it shows the amount of equity in the home. The more equity you have in the home more likely you will be able to sell the home if needed and prevent foreclosure.
Typical conventional loans have a LTV limit of 80% meaning you need to have a down payment of at least 20%. For a conventional loan when you are at a LTV of 80% or less you have no mortgage insurance. Many buyers do not have 20% so they opt for either lower down payment conventional loans or government insured loans.
Government insured loans, such as USDA loans do not require you to put down any down payment. Because your LTV is high at, 100% they require mortgage insurance premiums to protect themselves in case you go into default.
USDA Mortgage Insurance is mandatory on all USDA loans regardless of your down payment amount. USDA does not require a down payment which is why the USDA mortgage insurance is mandatory. The majority of buyers will not put down any money and it is too time consuming for USDA to have a different amount for everyone if there is a down payment made.
USDA mortgage insurance is made up of two parts; the Funding Fee (or Guarantee Fee) and a monthly Mortgage Insurance Premium. The Funding Fee for a 30 year loan term is a standard 2% of your loan amount financed on top of your total loan amount. This is not out of pocket money, but a premium that is added to the Base Loan Amount (which most of the time will be your Purchase Price of the home you are buying). The monthly mortgage insurance premium is currently 0.50% of your loan amount financed into your monthly payment.
The mortgage insurance that USDA requires is still much less than what you would need to pay for FHA Mortgage Insurance or any conventional loans that do not have at least a 20% down payment. This is a great way to keep your payment lower without being required to make a down payment of 20%.