Your USDA Loan Refinance Options
Did you know that over 3.4 million families have used a USDA loan to purchase a home? This might not come as a surprise since USDA loans are useful for making homeownership possible in rural and suburban areas. This is especially true for buyers who don't have the money for a down payment.
If you’re among those who’ve used the program to purchase a home in the past, you might have asked yourself, “Can I refinance a USDA loan?” Absolutely, as long as it’s been at least 12 months since you took out your original mortgage.
As we'll explain, there are currently three options for refinancing your loan:
Streamlined Refinance
Streamlined-Assist Refinance
Non-Streamlined Refinance
Which is the best USDA refinance option for your needs? Read on to learn more about the smartest choice in your situation.
Top Reasons to Refinance Your USDA Loan
Lower Monthly Payments
One of the main reasons people choose to refinance USDA loans is to reduce monthly payments (given that you refinance when interest rates are lower).
Change Up Loan Terms
Among the biggest benefits of USDA loan refinancing is the opportunity to change your loan terms, usually to a new 30-year fixed-rate mortgage. While this extends the duration of the loan, it can still be advantageous. Why? Because you can lower your monthly bills, giving you some room to breathe.
Improve Credit Score
Another significant reason for USDA refinance is the chance to improve your credit score. Lower monthly payments make it easier to pay your bills on time, which boosts your credit over time.
Keep In Mind
Although USDA refinance can be advantageous in many scenarios, there are also some drawbacks to be aware of. Unfortunately, refinancing a USDA loan means paying the upfront 1% guarantee fee again. It’s also not possible to shorten your loan term. You can only choose a 30-year, fixed-rate loan.
Your Three USDA Refinance Options
Existing borrowers have three options for refinancing USDA loans: Streamlined, Streamlined-Assist, and Non-Streamlined. The biggest challenge regarding refinancing USDA loans is that only a few mortgage lenders offer them. So, if you decide to refinance your loan, make sure to compare different lenders and interest rates to get the best deal possible.
If you're wondering which of these three programs best fits your needs, the answer depends on your credit, home equity, and current loan standing.
However, the Streamlined-Assist Refinance is typically the go-to option for most borrowers. Compared to the other two, this program has a simpler qualification process requiring no appraisal or credit check.
Let's take a deeper look at each of the options.
Requirement | Streamlined | Streamlined-Assist | Non-Streamlined |
Mortgage History | On-time payments for the last 6 months | On-time payments for the last 12 months | On-time payments for the last 12 months |
Appraisal | May be required, depending on the lender | No appraisal needed | Required |
Borrower Modifications | Can add or remove existing borrowers | Can add new borrowers or remove deceased borrowers | Can add or remove existing borrowers |
Credit Check | Required | Not required | Required |
Loan-to-Value (LTV) Maximum | Up to the remaining loan balance | Up to the remaining loan balance | Up to the remaining loan balance |
Closing Costs | Can be rolled into the loan | Can be included in the new loan | Can be rolled into the loan |
Income verification | Required | Not required | Required |
Streamlined Refinance
This refinance program was first launched in 2012 following other successful loan programs, like the VA Interest Rate Reduction Refinance Loan. With this option, borrowers can refinance their loan without a new appraisal (however, they must meet credit and debt-to-income requirements) and add or remove other borrowers from the loan.
Remember that the maximum loan amount can't be higher than what you originally borrowed. It's also important to note that conventional loans usually don't have streamlined refinance options since they are not backed by the government and, therefore, provide more risk for the lender.
Streamlined-Assist Refinance
If you're hoping to lower your home loan's interest rate and monthly payment, your best option is the USDA Streamlined-Assist Refinance. The biggest advantage of this program is that no credit approval is required. This means you won't have to show your credit report, credit score, or debt-to-income ratio. So, even if your finances are less than ideal, you might still qualify for this refinance.
What's great is that you can take advantage of this program even if you have no equity or if your home's value has decreased.
Generally, the requirements for the USDA Streamline-Assist Refinance are similar to those of the Streamline; however, there are some differences. With this option, you can't remove borrowers; you can only add them. Note that the refinance should reduce your monthly mortgage payment by at least $50. Also, unlike a Streamlined Refinance, you can't remove borrowers from the loan (but you can add them).
Non-Streamlined Refinance
This refinance option is quite similar to the USDA Streamline, but the main difference is that borrowers must get a new appraisal. You'll also need to provide information on your income and undergo a credit check.
So, why would you consider using a Non-Streamlined Refinance? The main advantage of this program is that it allows borrowers to avoid the $50 monthly payment reduction requirement. It may also be a smart choice if you want to get an updated home appraisal.
Generally, the Non-Streamlined Refinance is comparable to the rate-and-term refinance options offered by FHA, VA, and conventional loans.
Refinancing Out of USDA and into Conventional
In some cases, it may be beneficial to refinance your USDA-guaranteed loan to a conventional loan. This is usually advantageous if you wish to remove your mortgage insurance, cash out your home equity, or shorten the term of your loan.
However, keep in mind that you can only refinance out of a USDA loan if you have at least 3% equity in your home. For those who wish to remove mortgage insurance, the number is even higher—20%.
Overall, the best time to refinance out of USDA and into a conventional loan is when you've built your equity and your financial situation has improved since conventional loans are more credit-sensitive.
What About Conventional to USDA?
Refinancing a conventional loan into a USDA loan is not possible mainly due to the strict eligibility requirements related to income limits, the location of the property, and loan purpose. The whole idea behind USDA loans is to help people who may not qualify for conventional financing.
Is There a USDA Cash-Out Refinance Option?
Unfortunately, unlike other mortgage programs, USDA loans don't offer cash-out refinancing. If you'd like to use your home's equity, you should consider refinancing with a different loan type, such as a VA, FHA, or conventional loan.
USDA Refinances in a Nutshell
Since you purchased your home, your lifestyle or financial situation may have changed. This might have made you consider refinancing your USDA loan. While it may seem like a hassle, it may benefit you financially.
Pro Tip: If you've decided to refinance your USDA loan, try to close the deal near the end of the month. This helps reduce the prepaid interest, which can save you extra money upfront.
