How is the Up Front Guarantee Fee calculated when it is not financed?

The Up Front Guarantee Fee is calculated by multiplying the loan amount by a specific percentage, which is set at 1.00%. This percentage reflects the cost of the guarantee provided by the USDA for the loan, ensuring that lenders are compensated for the risk involved in lending to borrowers in rural areas.

When this fee is not financed as part of the loan, it is paid upfront and directly affects the total closing costs that the borrower must cover. Thus, calculating it as a percentage of the loan amount allows for a straightforward understanding of the fee based on the size of the loan.

In this context, other methods of calculating the fee would not accurately reflect the intended formula for the Up Front Guarantee Fee. For instance, dividing the loan amount by 0.990 alters the original value in a way that does not appropriately represent the fee rate, and adding a fixed fee of $1,000 does not scale with the loan's size, which could lead to discrepancies in how much borrowers are obligated to pay. Similarly, using 0.01% would significantly underestimate the fee, as it does not align with the established rate of 1.00%. Understanding this calculation is essential for borrowers to budget accurately for their loan closing costs.