You can refinance a loan guaranteed by the U.S. Department of Agriculture (USDA), and it could save you significantly if interest rates are lower. Should you refinance a USDA loan? It depends on your situation and other factors. With a USDA refinance, you can get rid of mortgage insurance and replace the loan with a conventional loan backed by the Federal Housing Administration (FHA) or USDA. You can also do a rate-and-term refinance to lower your interest rate and reset your loan term. Can you refinance a USDA loan? Yes! Read on to understand how.
How Refinancing a USDA Loan Works
Refinancing a USDA loan allows borrowers with an existing USDA mortgage to replace it with a new loan. You can refinance a USDA loan to get a lower interest rate, reduce monthly mortgage payments, move from an adjustable rate to a fixed rate mortgage, or access your home equity for other purposes.
When you refinance, you have options. You can refinance the USDA loan with another USDA loan as long as you still meet income and other government requirements. You can also choose to refinance the loan with an FHA loan or a conventional, non-government-backed loan.
Even if you have little or no equity in your home, you can choose USDA streamlined refinance loans or rate and term refinancing to lower your interest rate and reset the terms of your loan, giving you thus greater flexibility.
Refinancing a USDA loan is similar to refinancing any other mortgage. You’ll want to research mortgage lenders, refinance rates, develop a refinancing plan, and complete the relevant applications.
How to Refinance a USDA Loan in 5 Steps
If you’re ready to take on a USDA refinance, there are a few steps you need to follow.
1. Determine if you are eligible to refinance
Verify that you meet the USDA’s eligibility requirements for refinancing its loans, including criteria such as being current on your existing USDA loan for 12 months. You must also meet income criteria which cannot exceed the adjusted annual income limit for the
county or metropolitan statistical area where the dwelling is located.
Generally, borrowers must earn less than 115% of their area’s median income and have a credit score of at least 640. If you don’t qualify for refinancing, you can work to raise your credit score or consider a FHA or conventional loan for mortgage refinancing. Learn about the customization requirements for a USDA refinance here.
2. Find a USDA Approved Lender
Research and contact USDA approved mortgage lenders to find the one offering the best terms and interest rates to refinance your USDA loan. You can compare rates from USDA-approved lenders online and contact local banks and credit unions. It is important to compare interest rates before choosing a new lender.
3. Gather the required documents
Gather and organize necessary documents such as proof of income, tax returns, and bank statements to provide to the lender during the application process. Required documents include:
- A government-issued ID, such as a driver’s license or passport
- Social Security Card and/or Social Security Number
- Proof of income, including pay stubs, W2, bank statements
- Tax returns
- Employment Verification
4. Submit a refinancing request
Complete the refinancing application provided by your chosen USDA-approved lender and provide them with all required documents. This step involves a thorough review of your financial situation and creditworthiness. The lender will use an underwriter to review your application, including your income, debts, credit score and mortgage payment history.
5. Finalize the refinancing process
If approved, the final step is to review and sign the loan agreement. You will need to pay the closing costs of the refinance and prepare to transition your existing USDA loan to the refinanced loan.
Before signing, make sure you understand the terms of the new loan and any changes in monthly payments or interest rates. Carefully review the prepayment policy, total mortgage term, and other differences between your existing USDA loan and the new mortgage offer. You can speak with a real estate attorney to understand the contract and discuss any doubts.
USDA Loan Refinancing Options
You have several types to refinance your USDA loan. Here are the most common.
Simplified assistance refinancing
USDA Streamlined-Assist Refinance is a program that allows homeowners with a current USDA loan to refinance their mortgages with reduced documentation and underwriting requirements, making the process faster and easier. This program is for homeowners who have little or no equity in their home.
To qualify for a streamline refinance, you must have a USDA mortgage on your home. The accommodation must be your primary residence and be located in a rural or suburban area. You must have made at least 12 consecutive mortgage payments. With a USDA streamline refinance, you are not required to show your credit score or debt-to-income ratio.
USDA Streamlined Refinance is a refinancing option specifically for borrowers with an existing USDA loan, offering a streamlined application process and potentially lower interest rates.
With a USDA streamline refinance, you must show the lender your credit score and debt-to-income ratio to qualify. You’ll need a credit score of at least 640 and a debt-to-income ratio of less than 41%. Additionally, lenders may refuse to refinance the loan if your monthly payments are not reduced by at least $50.
You can add or remove a person’s name on the USDA mortgage with a streamline refinance. You only need 180 days of on-time payments for a streamlined refinance.
USDA Non-Streamlined Refinancing refers to a refinancing option for borrowers with a USDA loan who do not qualify for the streamlined process. A non-streamlined refinance requires a full underwriting review and documentation similar to the original loan application.
With this option, you will need to pass a credit check, meet debt requirements, and pay for a new appraisal. There are also additional closing costs associated with a non-streamlined refinance. You could benefit from a non-streamline refinance even if your monthly payments are not reduced by at least $50 per month.
Conventional loan refinancing
USDA to Conventional Refinancing is a refinancing option for borrowers with a USDA loan who want to move to a conventional loan, possibly to obtain better terms or remove USDA loan requirements, such as mortgage insurance. With a conventional loan refinance, you will pay off the existing USDA loan with the proceeds from the conventional loan.
You may choose a conventional loan to refinance if you no longer meet USDA loan requirements or want to avoid paying mortgage insurance.
Benefits of Refinancing a USDA Loan
There are many situations in which refinancing a USDA loan makes sense. The benefits of refinancing a USDA loan include:
1. Reduced monthly payments
Refinancing a USDA loan can result in lower monthly payments, which can help borrowers save money and have more disposable income each month. You can choose a USDA refinance when interest rates are lower or when you have at least 20% equity in the home and can refinance without a mortgage.
2. Withdrawal option
Refinancing a USDA loan also provides a cashout option, allowing you to tap into the equity in your home and use the money for a variety of purposes, such as home improvements or debt consolidation. This can also allow you to refinance for longer terms, thereby reducing monthly payments.
3. Improved Credit Score
Refinancing a USDA loan can potentially lead to an improved credit score because borrowers who make their payments in a timely manner and manage their new loan responsibly can demonstrate good credit behavior toward lenders . If the lower payment amount means you can more easily make each monthly payment on time, this can have a significant impact on improving credit over time.
Disadvantages of Refinancing a USDA Loan
There are a few drawbacks to refinancing a USDA loan, including cost. Here’s what you’ll want to compare to the potential benefits.
1. Costs associated with refinancing
Refinancing a USDA loan can result in various costs, such as closing, application and appraisal fees, which can add up and potentially exceed the benefits of refinancing. It doesn’t make sense to pay a refinance fee unless your total interest rate or monthly costs are significantly lower than what you’re currently paying.
2. Potential Loss of Benefits Provided by USDA Loans
USDA loans offer unique benefits such as low or no down payment requirements, low interest rates, and flexible credit guidelines, and refinancing can cause borrowers to lose these beneficial features. This is especially true if you are switching from a USDA loan to a conventional loan.
Refinance a USDA Mortgage
Can you refinance a USDA loan? Yes! Should you refinance? It depends on your current interest rate, the best rates available and the total cost of refinancing. A mortgage refinance can make sense if you need to access equity, extend the loan term, or save on monthly costs. To get started, research some of the best refinancing rates.
Frequently asked questions
You can refinance your USDA loan if your mortgage payments are current and meet credit, debt and income requirements.
USDA loan refinancing has a similar timeline to other refinancing options, typically taking 30 to 45 days.
There are no minimum equity requirements to refinance a USDA loan. You can refinance your USDA mortgage with little or no equity.