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USDA Mortgage Insurance
As the popularity of USDA Loans continue to grow, an increasing number of people are beginning to ask more loan-specific questions. One of the most confusing things for borrowers is USDA PMI. PMI is an initialism for Private Mortgage Insurance. While USDA does have a form of MI (Mortgage Insurance) it is not PMI (Private Mortgage Insurance).
PMI is primarily associated with conventional loans. Any conventional loan where the borrower does not put 20% down usually has PMI. Loans over 80% LTV (loan-to-value) are considered risker by lenders thus requiring PMI. There are a handful of national companies that offer PMI. Unlike the government-backed loans such as FHA and USDA, the PMI companies charge mortgage insurance rates based on several factors, therefore not every buyer gets the same rate. Factors such as credit score, LTV, property state, and loan amount impact the borrowers' PMI rate. For example, a borrower who has a credit score of 660 will have a higher rate than someone with a 760. Another example is if a borrower has a LTV of 90%, they will have a lower PMI rate than someone with a LTV of 97%.
As state earlier there is no such thing as USDA PMI, but there is mortgage insurance. Instead of being paid to a private company the mortgage insurance is actually paid to the government. Where PMI companies have different rates for different risk thresholds, the USDA MI is a set percentage regardless of credit score or loan-to-value. USDA Loans have an upfront fee and monthly mortgage insurance fee. The upfront fee is 2.75% as of October 2015. This is actually added to the loan amount so the borrower doesn’t see a huge impact to their monthly payment and they don't have to come up with the amount out-of-pocket. The monthly fee of .50% is low compared to loan types. This is one of the many reasons why the popularity of the USDA Loan continues to rise.