USDA-to-Conventional Refinance: How To Qualify
USDA loans allow homebuyers to purchase property in rural communities with no down payment and attractive interest rates.
But when it comes time to refinance, borrowers aren't limited to USDA refinance programs.
Refinancing to a conventional loan comes with big advantages.
Can You Refinance a USDA Loan to Conventional?
If you meet conventional lender guidelines, you can refinance your USDA loan into a conventional mortgage. The process is no different from most refinances and involves applying with a lender, undergoing a credit check and income verification, and getting an updated home appraisal.
You cannot, however, refinance a conventional loan to USDA.
Guidelines for Refinancing to a Conventional Mortgage
In most cases, refinancing to a conventional mortgage will require a credit score of at least 620 and a debt-to-income ratio of 45% or lower. This means your monthly debt obligations, including your mortgage, car loans, and other debt payments, must be less than 45% of your monthly qualifying income.
Conventional loans have no geographic restrictions as USDA loans do.
Apart from these broad requirements, the guidelines for refinancing your USDA mortgage to a conventional loan will depend on the refinance you're applying for.
Conventional Rate-and-Term Refinances
A conventional rate-and-term refinance is used to improve the terms of the loan without taking cash out. You can:
Reducing your interest rate and payment
Remove USDA mortgage insurance.
Conventional rate-and-term refinances are available with as little as 5% equity in your home, but preferably 20% if you’d like to eliminate mortgage insurance.
Conventional Cash-Out Refinances
Conventional cash-out refinances allow you to change your loan's interest rate and term and receive a portion of your home's equity back as cash.
With a conventional cash-out refinance, you can borrow up to 80% of your home's value. To qualify, you'll need to begin with more than 20% equity so there’s room to take cash out.
To qualify for a conventional cash-out refinance, you must have had your current USDA loan (or any loan) for 12 months.
Start your conventional cash-out refinance.
Benefits of Refinancing Conventional
USDA loans are a powerful tool for helping lower-income individuals and families achieve home ownership. However, refinancing a USDA mortgage to a conventional mortgage has some benefits that are difficult to ignore.
No USDA upfront guarantee or annual fee. All USDA loans – including refinances – come with a 1% upfront “guarantee fee” due at closing. Plus you pay an annual fee (sometimes known as "USDA mortgage insurance"), split across monthly payments, totaling 0.35% of your loan balance. Conventional loans don't have this cost, although you will need to purchase mortgage insurance if you have less than 20% equity in your home.
You can choose your loan length. USDA loans only offer 30-year mortgages. This means starting your repayment period back at square one. With a conventional loan, you can refinance to a shorter term such as a 15, 20, or 25 years.
Adjustable-rate mortgages are an option. USDA loans always come with fixed rates. By refinancing into conventional, you can opt for an adjustable-rate mortgage if that's what's best for your financial situation.
Receive built-up equity back as cash. You can do a conventional cash-out refinance and withdraw funds at closing to use in any manner you see fit. Often, homeowners cash out to fund repairs and improvements, consolidate other high-interest debt, or purchase a second home or investment property. The USDA does not offer cash-out refinance loans.
You don’t need to still live in the home. With a conventional mortgage, you can refinance your house as a second home or investment property if you no longer live there full-time or rent it out. To refinance with the USDA, you must certify that the house remains your primary residence.
Disadvantages of Refinancing to Conventional
While many homeowners find that refinancing their USDA mortgage to conventional is the best option, there are some disadvantages to consider. In some instances, it may even make more sense to refinance through a USDA lender.
There are no streamline conventional refinances. The USDA offers a couple of low-doc refinance programs that don't require a new home appraisal. Their Streamlined-Assist option doesn't even require a credit check or income re-verification. Conventional lenders have no streamline program, so you’ll need to go through the entire underwriting process.
Rates may be higher for some borrowers. Since the federal government subsidizes USDA loans, interest rates are often lower than conventional mortgages. However, factor in the 1% USDA upfront fee and the 0.35% annual fee to get an accurate comparison.
You may not have enough equity. Most USDA buyers put zero down plus finance the 1% upfront USDA fee. This could leave you with very little equity – if any at all – when you refinance. You need at least 5% equity for a conventional refinance, but more if you’d like to wrap closing costs into the refi.
You may need mortgage insurance. A loan-to-value of 80% or more requires private mortgage insurance (PMI). PMI is risk-based, so some homeowners might pay under $100 per month, but the price is likely to be higher in most cases.
There’s a longer waiting period after bankruptcy. If you’ve filed for bankruptcy in the past, you’ll need to wait between two and four years to get a conventional loan. A USDA refinance's waiting period is shorter, at one to three years. Plus, if you opt for a streamline refinance, you may not face any waiting requirements at all.
USDA Refinance Options
Are you on the fence about a conventional refinance or worried you won't qualify based on your credit or finances? Maybe home values have stagnated in your area, and you don’t meet the minimum equity requirement for a conventional loan.
Luckily, the USDA provides several refinance options for current loan holders. The most popular of which is the USDA Streamlined-Assist.
USDA Streamlined-Assist Refinance
The USDA Streamlined-Assist is a low-doc mortgage that won’t require you to undergo a credit check or reverify your income. You won’t need to have your property reappraised, either.
You can be eligible for a Streamlined-Assist refinance once you've had your current USDA loan for at least a year and have made your twelve most recent monthly payments on time.
To qualify for a Streamlined-Assist, your refinance must reduce your monthly principal, interest, and annual fee payment by at least $50.
Find your USDA Streamlined-Assist lender.
USDA Streamlined Refinance
Like the Streamlined-Assist, the USDA Streamlined refinance allows you to refinance without obtaining a new appraisal. However, the standard Streamlined loan does require you to undergo a credit check and income verification.
Why would someone opt for the USDA Streamlined instead of the Streamlined-Assist? A few of the benefits include:
You can drop borrowers from your mortgage – with a Streamlined-Assist, only deceased co-borrowers can be removed
You only need six months of on-time mortgage payments instead of 12, but your loan must still be at least a year old
You don’t need to reduce your monthly payment by $50 to qualify, although your new interest rate must be the same or lower than your current mortgage
USDA Non-Streamlined Refinance
For borrowers needing more flexibility, the USDA offers a Non-Streamlined refinance. Although it requires you to undergo a full credit check, income verification, and have your home appraised, the USDA Non-Streamlined refinance lets you:
Include tax and insurance escrow funds in your mortgage
Include a subsidy recapture in your mortgage (if you have an applicable direct loan)
Add or remove borrowers
Refinance with just six months of on-time payments (loan must still be seasoned for at least a year)
Refinance without meeting the $50 net tangible benefit required by the Streamlined-Assist program
Homeowners with an existing USDA loan would typically only opt for a Non-Streamlined refinance if they needed to roll escrow funds or a subsidy recapture into their mortgage. Otherwise, a Streamlined or Streamlined-Assist refinance would be more practical in most situations.
Get started on your USDA refinance.
Find Out Which Conventional Refinance Options Are Available
Conventional mortgages offer a range of benefits over USDA loans, including more flexible terms, no upfront or annual guarantee fee, and the ability to withdraw equity through a cash-out refinance. Still, borrowers just looking for a rate-and-term refinance may opt for the USDA Streamlined-Assist for a simplified low-doc process.
To discover which conventional refinance options are available to you and if a USDA Streamlined-Assist may be a better fit, apply with a qualified lender experienced with both types of refinances.
