It Is Possible to Refinance a USDA Loan?
The federal government backs USDA loans. USDA house loans can be refinanced just like any other mortgage loan.
As long as your credit is good and your loan payments are current, you should be able to refinance into a loan with a reduced interest rate and monthly payment.
The USDA Streamline program allows eligible homeowners to bypass the credit and income approval process.
The most challenging aspect of refinancing a USDA loan is that not all mortgage lenders provide them. Discover a few lenders that offer such loans, then compare their interest rates to find the best price on your new loan.
Refinancing USDA: Key Takeaways
There are several possibilities for refinancing a USDA mortgage. But the majority of borrowers will utilize one of two programs:
- The USDA Streamlined-Assist Refinance to lock in a reduced interest rate and monthly payment with less documentation.
- Refinancing a conventional loan to eliminate mortgage insurance payments or withdraw cash.
To refinance under the USDA program, you must hold your current loan for at least a year. A traditional loan, however, may enable you to refinance sooner.
With interest rates remaining at record lows and home equity rising across the country, now is an excellent time to verify your refinance eligibility.
USDA Refinancing Choices
To refinance a mortgage, you must apply for a new home loan to replace your current mortgage.
A new loan allows homeowners to lock in a reduced interest rate and minimize their monthly mortgage payments.
However, refinancing can also benefit you:
- Tapping into your equity
- Stop paying mortgage insurance premiums
- Changing loan programs
- Pay off your mortgage faster.
- Remove the individual’s name from the loan.
If you presently have a USDA Rural Development house loan, whether a USDA Direct Loan or a USDA Guaranteed Loan, you have several refinancing alternatives. Your choice will rely on your intended outcome.
It also depends on the loan you qualify for, depending on your credit score, home equity, and loan balance.
The following information pertains to USDA refinancing alternatives.
Streamlined-Assist USDA Refinance
A USDA Streamlined-Assist Refinance is a streamlined process for refinancing. It is often the greatest choice to reduce the interest rate and monthly mortgage payments on a house loan.
The major advantage of a USDA Streamlined-Assist Refi is that no credit approval is necessary.
Therefore, the lender is not required to check your credit score, credit record, or debt-to-income ratio. Inquire about a lender’s requirements before submitting an application (but some do anyway).
You may be eligible for a lower interest rate with the Streamlined-Assist refinancing even if your finances are not in the finest shape.
Additionally, you can refinance your house with little or no equity. There is no requirement for a house appraisal, so you may be eligible to refinance even if the value of your property has decreased and the new loan amount exceeds it.
To qualify for this Streamline Refinance program, your monthly mortgage payment reduction must be at least $50.
Requirements for USDA Streamlined-Assist Refinance:
- No additional credit checks or debt-to-income ratio restrictions.
- Mortgage refinancing must lower the monthly payment by at least $50.
- The principle, interest, closing expenses, and upfront USDA guarantee fee can be financed into the new loan sum.
- Before refinancing, the USDA loan must have been paid on time for 12 consecutive months.
- Borrowers may only be withdrawn from a loan if they pass away, although a new co-borrower can be added.
- A new evaluation is necessary only when a borrower of Direct Loans obtains a subsidy.
- The home must be the principal residence of the borrower.
- The borrower’s income must still fall within the USDA’s limitations.
USDA Streamlined Refinancing
Like the Streamlined-Assist Refinance, the Streamlined Refinance loan does not require a fresh appraisal (unless you receive a subsidy on your USDA Direct Loan).
However, this Streamlined option is subject to credit clearance. Before authorizing your refinancing, your lender will examine your credit history, credit score, and income.
Included in the USDA Streamlined Refinance guidelines are the following:
- Credit standards must be met for USDA loans.
- The new loan sum might include the principle, interest, closing charges, escrow fees, and upfront guarantee fee.
- Before submitting a refinancing application, the current USDA loan must have been paid on time for 180 consecutive days.
- The borrower must have held the present mortgage for a minimum of one year before refinancing.
- Borrowers may be added or withdrawn from the loan so long as at least one original borrower remains.
- A new evaluation is necessary only when a borrower of Direct Loans obtains a subsidy.
- The home must be the principal residence of the borrower.
- The borrower’s family income must meet USDA income guidelines.
USDA Non-streamlined Refinancing
USDA homeowners also have the opportunity to refinance with a conventional, or non-streamlined loan.
A non-streamlined USDA refinancing needs a fresh appraisal, a comprehensive income analysis, and a credit check.
This is an alternative if you wish to circumvent the $50 monthly payment reduction requirement.
Guidelines for a conventional USDA refinance:
- Borrowers must fulfill the USDA’s credit and debt-to-income (DTI) standards, as well as through a comprehensive screening process.
- The new loan sum might include the principle, interest, closing charges, and upfront guarantee fee (up to the new appraised value)
- Before submitting a refinancing application, the current mortgage must have been paid on time for 180 days.
- The borrower must have held the present mortgage for a minimum of one year before refinancing.
- One of the original borrowers must stay on the loan, with the possibility of adding a second.
- The refinanced home must be the principal residence of the borrower.
- The borrower’s household income cannot exceed the USDA’s income limitations.
USDA-To-Conventional Refinancing
Some homeowners will find it more advantageous to refinance out of their USDA-guaranteed loan and into another loan type, typically a conventional loan.
There are three primary reasons to convert a USDA loan into a conventional loan:
- Eliminating USDA mortgage insurance
- To reduce the loan’s term
- To withdraw home equity
To refinish from a USDA loan to a conventional loan, most lenders need a minimum of 3 percent equity.
To eliminate mortgage insurance, you must have at least 20 percent equity (meaning your loan-to-value ratio is 80 percent or less).
The lender will also demand a new home assessment to determine your accessible home equity by comparing your house’s value to your present loan debt.
For a traditional loan, you must also fulfill debt-to-income ratio restrictions in addition to the minimum credit score requirement, which is usually 620.
Eliminating Mortgage Insurance
In addition to their monthly mortgage payments, all USDA borrowers must pay an upfront guarantee cost and an annual fee.
The yearly charge is divided into monthly payments and applied to the loan’s mortgage payments as a kind of insurance. Comparable to private mortgage insurance (PMI) for traditional loans.
The distinction is that conventional mortgage lenders waive PMI when a property’s equity reaches around 22 percent. The USDA charges mortgage insurance for the duration of the loan.
Once you have 20 percent equity in your home, however, you may convert your USDA loan into a conventional loan and eliminate mortgage insurance.
This will reduce your monthly payments and overall loan costs by eliminating the additional insurance fee from your monthly mortgage statement.
Reduce Your Term
The USDA offers only a 30-year, fixed-rate loan for house purchases and refinancing.
For homeowners who have held their present mortgage for an extended period, refinancing at 30 years may boost their overall interest expenses.
You might refinance into a conventional loan to reduce overall payments or pay off the debt faster. Conventional mortgages include 20, 15, and even 10 years loan periods.
However, decreasing the loan length would often increase the monthly payments. Therefore, this is not appropriate for someone seeking to reduce their monthly payment.
Cash-out Refinancing
Refinancing is known as cash-out refinancing, in which equity is used to get cash.
Unlike conventional, VA, and FHA loans, USDA loans do not provide cash-out refinancing.
To access your home equity, you will likely need to convert your USDA loan into a conventional loan. To make the cash-out refinance worthwhile, you’ll need a minimum credit score of 620 and more than 20 percent equity.
FHA cash-out mortgages are available to homeowners with credit scores below 620 who have more than 20 percent equity in their homes. However, USDA loans have lower upfront and yearly mortgage insurance payments than FHA loans. Therefore, your payments may increase.
Refinancing a USDA Home Loan: Pros and Cons
Refinancing from one USDA loan to another might be advantageous, particularly if you only need a reduced interest rate and monthly payment.
Pros of USDA Refinancing
- Options for Streamlined Refinancing are often quicker, simpler, and less expensive than standard refinancing.
- No new appraisal is required for a Streamlined Refinance; thus, no home equity is required to qualify.
- USDA’s upfront guarantee cost is less expensive than FHA’s upfront mortgage insurance premium, and USDA’s yearly payments are also lower.
- USDA loans often have lower rates of interest than conventional loans.
- If you are underwater on your USDA loan, meaning you owe more than your house is worth, you might refinance.
- With a USDA Streamlined-Assist Refinance, a high debt-to-income ratio and a low credit score are not issues.
- You can add closing expenses to the amount of your new loan to reduce this out-of-pocket payment.
A different refinancing strategy may be preferable depending on your credit score and financial objectives.
Cons of USDA Refinancing:
- You cannot withdraw home equity.
- With USDA refinancing, you cannot decrease your loan term; you must select a 30-year, fixed-rate loan.
- The USDA has stricter minimum credit standards for loans. A minimum credit score of 640 is required, as opposed to 620 for a conventional loan and 580 for an FHA loan.
- Refinancing a USDA loan involves payment of the first 1% guarantee fee.
- If your current salary exceeds the USDA’s restrictions, you do not qualify.
I’ve Been Advised That I Cannot Refinance My USDA Loan?
Perhaps you called a lender who advertised cheap interest rates, only to be told that you cannot refinance your USDA loan.
There are several possible causes for this to occur.
For starters, the lender may not provide USDA mortgages. You must look around to find a lender that does so.
The good news is that you will not have to search extensively. National banks, credit unions, mortgage firms, and online lenders are authorized to issue these loans.
You may also encounter difficulties if you do not fulfill the program’s minimum requirements.
For instance, a lender may decline your Streamlined Refinance if your mortgage is less than a year old or you have yet to make on-time payments.
Or you may be attempting to convert a USDA loan into a conventional loan without sufficient equity.
Communicate with the lender to determine the precise issue. If you are now ineligible for refinancing, you may become eligible during the following 6 to 12 months.
If you fulfill the aforementioned standards, but your refinancing application is still denied, you should try again with a different lender.
You’ll discover a mortgage lender eager to refinance your loan, even if the first one you approached refused.
USDA Mortgage FAQ
How Quickly Can a Usda Mortgage Be Refinanced?
If you are refinancing a USDA loan into another USDA loan, your current mortgage must be at least one year old (with on-time payments for the past six months). It may be possible to refinance immediately if you wish to transfer from a USDA loan to a conventional loan. However, you will likely want at least 3 percent equity in the property. Therefore, you may have to delay refinancing if you utilized the USDA’s zero-down-payment credit.
Does PMI Disappear With a Usda Loan?
USDA loans do not need private mortgage insurance, sometimes known as ‘PMI,’ but borrowers must pay an annual USDA guarantee fee (in monthly payments) that functions as mortgage insurance. This fee is charged for the duration of a USDA loan. Once the home’s equity reaches at least 20%, you may be eligible to convert your USDA loan into a conventional loan and eliminate mortgage insurance.
What Is a Streamlined USDA Refinance?
Typically, a USDA Streamlined Refinance does not require a house appraisal. Existing USDA loans are eligible for simple rate-term refinancing under this program. Typically, the Streamlined Refinance loan involves a credit check and proof of income. Ask your lenders about the USDA’s Streamlined-Assistance Refinance program to avoid these stages and the house assessment.
Does USDA Permit Cash-Out Refinancing?
USDA mortgages do not permit cash-out refinancing. If you desire a cash-out refinance, you must refinance your USDA mortgage into a conventional loan.
Do USDA Loans Pay the Cost of Closing?
For Streamlined and non-Streamlined refinances, the USDA permits borrowers to roll closing fees into the new loan total to lower homeowners’ out-of-pocket expenses. This is often not an option for homebuyers (unless the home’s worth exceeds the purchase price) but rather for refinancers.
What Amount of Equity Is Required to Refinance a USDA Loan?
USDA loan refinancing programs have no maximum loan-to-value ratio, allowing borrowers with little or no equity to refinance. You will need to apply for a Streamlined-Assist Refinance if you are underwater. The lender may need a minimum of 3 percent equity to convert a USDA loan to a conventional loan. To avoid mortgage insurance on your new conventional loan, you must have at least 20 percent equity.
Why Would a USDA Loan Get Denied?
A USDA refinancing might be denied for a variety of reasons. For instance, if your new loan payments are not decreased by at least $50 per month, you will not qualify for the Streamlined-Assist Refinance program the USDA offers. Lenders may also only accept your refinancing application if you have held your previous USDA loan for at least a year. And remember that certain USDA refinancing programs need a fresh examination of your credit score and debt-to-income ratio. The lender may decline your application if your credit score falls below 640 or if your debt-to-income ratio surpasses 41 percent.
Can You Refinance Your USDA Loan if You No Longer Live in a Rural Area?
Yes. If your property’s original address qualifies for a USDA loan, you can refinance your home with a USDA loan. This is true even if your residence no longer falls inside a USDA-defined rural region.
If Your Salary Exceeds the Usda’s Maximum, Are You Eligible for a USDA Refinance?
No. Only borrowers whose income falls below the USDA’s criteria are eligible for a USDA loan, including a refinancing. Borrowers of USDA Guaranteed Loans must earn less than 115 percent of the area’s median income. Income limitations for USDA Direct Loans are much lower. Entering your location and monthly income on usda.gov will allow you to determine if you still qualify. If you wish to refinance but do not qualify for a USDA loan due to your income, you can still do it with a conventional or FHA loan.
USDA Loans Are Eligible for Refinancing
Yes, it is possible to refinance out of a USDA loan and into a conventional, FHA, or VA loan. (Only active and retired military people are eligible for VA loans.) Different mortgages have different standards, so you must fulfill the minimum requirements of the new loan program. The amount of equity you have in your home, your credit score, your debt-to-income ratio, and your loan-to-value ratio affect your eligibility for another form of a mortgage.
What Are the Usda Refinancing Rates as of Today?
All mortgage interest rates are historically low, and USDA loan interest rates are no exception.
If you qualify for a USDA Streamlined Refinance, you can reduce your interest rate without a credit check or house assessment.
Examine your rates and eligibility to determine your eligibility.
