USDA loans are a great option for home buyers purchasing properties in rural and suburban areas. This program is offered by the US Department of Agriculture. It offers great features that extend home ownership opportunities to homebuyers who may otherwise not be able to purchase. If you are planning to use this type of mortgage for your home purchase this fall, here’s great news. Lower fees for USDA home loans will start October 1, 2016.
Lower Fees for USDA Home Loans
Starting October 2016, the mortgage insurance charged for USDA home loans will be reduced. There are two insurance premiums that apply to these loans. First is an up-front mortgage insurance premium that is included in closing costs (which may be rolled into the loan). Second is a monthly mortgage insurance premium that is added to the monthly mortgage payment. Both of these will be changing.
The up-front mortgage insurance premium is reducing from 2.75% of the loan amount to 1%. The monthly premium is dropping from 0.45% to 0.35%. Again, the percentage is calculated based on the starting loan amount.
Reasons for the Lower Fees
Mortgage insurance is typically charged on loans where the down payment is less than 20%. The funds are used to cover lenders who would incur a loss if a loan goes into foreclosure. In cases of foreclosure, it’s unlikely that lenders will receive back more than 80% of the value of a home. Therefore, low downpayment loans are higher risk. Mortgage insurance covers that added risk and potential loss.
As with most types of insurance, premiums are collected from everyone and pooled into a fund. That fund is then used when needed to cover mortgage delinquencies and foreclosure losses. Home buyers using USDA loans have had a lower delinquency and foreclosure rate, so there are plenty of funds available in the pool. As a result, USDA is able to lower the mortgage insurance premiums collected on any new loans beginning October 1st.
What This Change Means to Home Buyers
Lower fees is always great news for home buyers. The lower up-front mortgage insurance premium means lower closing costs. Buyers who are rolling closing costs into the balance of their loan will have a lower mortgage balance to start off with. This gives greater opportunity to build equity in the home. The lower monthly insurance premium will reduce monthly housing expenses, directly impacting home affordability. It’s all around great news for home buyers in rural and suburban areas that qualify for USDA financing.
If you are looking to purchase a home, contact me to evaluate your qualification for special programs such as USDA home loans. I can prepare a free pre-approval to get you on the way to home ownership!