If you plan to buy a home or refinance your mortgage with a U.S. Department of Agriculture, or USDA, loan, you had better act soon.
These loans, which are one of the few options for low-cost, no down payment mortgages, are about to get more expensive.
Borrowers have until Sept. 30 to close on USDA mortgages if they want to avoid a new annual fee that will increase monthly payments and in some cases prevent applicants from getting loans.
If you are buyer:
USDA loans currently don’t require mortgage insurance premiums. They require only an upfront guarantee fee of 3.5 percent of the total mortgage amount. The one-time fee is added to the total balance of the mortgage and financed into the loan.
On Oct.1, that 3.5 percent fee will decrease to 2 percent. But the USDA will implement a new annual fee of 0.3 percent of the balance of the loan. This fee will be added to the monthly payments.
If you are refinancing:
Refinancers will have to pay the annual 0.3 percent fee, plus the current one-time upfront guarantee fee of 1 percent of the total of the mortgage. The upfront fee will stay unchanged for refinances.
Why the new fee?
The USDA insists this new fee is not an insurance premium, but rather a fee designed to make the program self-funding. Regardless, as far as your pocket is concerned, this is much like the mortgage insurance premium in most home loans.
“It’s like a version of mortgage insurance,” says Dan Klinger, president of K. Hovnanian American Mortgage in Boynton Beach, Fla.
How big of a deal?
In terms of how much more you’ll have to pay per month, it’s not the end of the world, Klinger says. For a borrower who needs a mortgage of $182,000, that translates into a monthly payment increase of about $32, assuming the interest rate is about 4.75 percent. Like the guarantee fee, the new fee can be financed into the loan, which means you could still get a USDA mortgage without a down payment.
But the slight monthly payment increase can easily disqualify borrowers, depending on their debt-to-income ratio, which is the formula used by lenders to measure your debt expenses versus your income.
Your DTI should be no higher than 36 percent for USDA loans, Klinger says.
“Those $10, $20 a month can make a huge difference for certain buyers,” he says. “Say they are at 36 percent and with the increase, they are now at 37 percent. They may not qualify for the loan.”
Klinger says he understands why the government wants to raise the fee but questions the timing of this and many other policy changes that make it more difficult and more expensive for borrowers to get mortgages.
“Anything that costs more in the environment that we are in is certainly a hiccup,” he says. “We are in biggest housing recession of our lifetime and we are raising fees? It doesn’t make sense.”