Brandon's Mortgage News

USDA 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 the Federal Housing Administration (FHA) in late 2010, USDA will be lowering the upfront 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!

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 for a look at the comparison of how a loan will look now vs. after Oct 1, 2011.

Here’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!

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.