Homeowners can refinance USDA loans just like any other mortgage. A USDA refinance is worth considering if you’re looking to finance a property in a rural or suburban area with a population of 10,000 or less. Eligibility is based on income and location, and the loan doesn’t require you to purchase a farm or ranch.
The decision to refinance USDA loan programs isn’t the right move for every borrower. Make sure you understand the advantages and disadvantages of this home loan option before talking to a lender. You’ll also learn there are different types of USDA refinancing and that you may benefit more from a particular program than another.
Pros and cons of a USDA refinance
Flexible credit requirements
You can refinance USDA loan programs without a perfect credit score. So, even if you have high credit balances or a few late payments in the past, you could still qualify for this loan option.
Competitive fixed interest rates
USDA borrowers have access to some of the lowest rates in the industry. Remember that a higher credit score translates to a potentially lower interest rate.
Low private mortgage insurance (PMI)
Private mortgage insurance covers the lender if you can’t continue making your payments. Opting for a USDA refinance ensures you’ll pay as little as possible in PMI.
No prepayment penalty
Some loan programs have a penalty for paying off your loan early. That’s not the case when you refinance USDA loans, though. Borrowers can choose to make extra principal payments on their mortgage and own their home free and clear sooner.
Can roll closing costs into the loan
You don’t have to worry about coming up with thousands of dollars for closing costs. A USDA refinance lets you roll these expenses into your new loan. That way, you can take advantage of everything that comes with this loan option without dipping into your savings.
Restrictions based on location
Unfortunately, borrowers can’t refinance USDA loans anywhere. The USDA website can help determine if the property you are interested in refinancing falls within a USDA eligible area.
If you exceed the income limits set by the USDA, you won’t be able to move forward with a USDA refinance. You can still talk to a lender about alternative loan options.
Unable to cash out your home equity
As property values rise and you continue making loan payments, your home equity increases. Unfortunately, you can’t access any of that equity as cash when you refinance a USDA loan.
No duplex homes allowed
The residence must be a condo, manufactured home, unit development, or single-family home.
Mortgage insurance included
PMI can add hundreds of dollars to your mortgage payment depending on the home you refinance. That said, chances are it’s a price worth paying for a more favorable home loan.
Qualifications to refinance a USDA loan
You will need to meet certain qualifications to refinance a USDA loan. These requirements vary based on the specific type of refinance you choose. Here are the main guidelines for a USDA Streamlined-Assist Refinance and a USDA Streamlined Refinance.
USDA Streamlined-Assist Refinance qualifications
The refinance must reduce the monthly payment by at least $50
Borrowers can finance loan costs, including the upfront USDA guarantee fee, into the new balance
Borrowers must show on-time payments of the current loan for 12 consecutive months
You must use the home as your primary residence
Your income can’t exceed the USDA’s income limits
USDA Streamlined Refinance qualifications
You must meet the program’s credit requirements
Borrowers must make on-time payments for 180 consecutive days before being eligible to refinance
Borrowers must wait a minimum of 12 months before moving forward with a new loan
The home must be your primary residence
Your household income must be within the program’s income limits
When does it make sense to refinance a USDA loan?
It’s worth considering a refinance USDA loan if you can lower your rate and monthly payment. Refinancing with a lender like American Financing can save you hundreds of dollars a month, plus tens of thousands in the long run. You can put those extra funds toward other financial goals, such as paying off high-interest debt or improving your home.
As we mentioned above, you can refinance your USDA loan even if your finances aren’t in great shape. While other loan programs have stricter credit or income guidelines, USDA options offer flexibility. More relaxed lending requirements mean fewer headaches during what many borrowers often deem a stressful process.
Additionally, when you opt for a USDA Streamlined-Assist Refinance, you can refinance your property if you have minimal equity. Since there’s no home appraisal involved, you can discuss USDA refinance strategies even if the new loan amount exceeds your home’s value. Refinancing, in this instance, keeps you from being ‘underwater’ on your mortgage (owing more on your home than it’s worth).
Those looking to lower their rate often choose this particular loan option. Borrowers enjoy a straightforward, efficient mortgage process and no credit approval from their lender. You can qualify for a USDA Streamlined-Assist Refinance even if your credit score and DTI could use some work.
Another plus of this loan option is you can finance all costs into the new loan, including the upfront USDA guarantee fee. You can also add a new co-borrower (spouse, friend, relative, etc.) in the future if necessary. USDA refinance lenders only require a new appraisal when a borrower receives a subsidy.
USDA Streamlined Refinance
Whereas a USDA Streamlined-Assist Refinances comes with no credit approval, the USDA Streamlined Refinance does require a credit check. Though exact credit qualifications vary by lender, it’s worth taking the time to boost your score in advance. Lenders need to see a year of consistent mortgage payments as well.
USDA non-streamlined refinance
Borrowers interested in this loan option should expect a new appraisal, credit check, and income review. If you’re the original borrower, you must remain on the loan for the duration of the term. Know that you have the option to roll closing costs and the upfront guarantee fee into your new loan with a USDA non-streamlined refinance.
Refinancing into a conventional loan
Perhaps you’re considering refinancing from a USDA loan into a conventional loan. If you’d like to eliminate mortgage insurance, known as the upfront guarantee fee and an annual fee with a USDA loan, you may explore this move. Doing so could lead to significant short-term and long-term savings.
Aside from getting rid of mortgage insurance, borrowers choose a conventional loan to shorten their term. These borrowers would prefer not to restart their term and instead save thousands on interest. It’s a sensible strategy when understanding the USDA only offers 30-year loans for refinancing.
The other reason to refinance into a conventional loan is to access some of your equity as cash. Though you’ll have to meet credit and equity requirements, you can use the funds for anything you want. Just know you’ll likely be responsible for higher monthly payments once you decide on a cash-out USDA refinance.
USDA refinance FAQ
How soon can you refinance a USDA mortgage?
It depends on your situation. If you want to refinance a USDA loan to another, you need to have had your current mortgage for at least 12 months. Borrowers hoping to transition from a USDA loan to a conventional loan should be able to refinance shortly after closing.
Do USDA loans cover closing costs?
USDA lenders provide the option to roll closing costs into the new loan.
Can you do a principal reduction on a USDA loan?
No, the USDA does not accept a principal reduction. A loan modification could be a viable alternative for some borrowers.
Can I refinance from FHA to USDA?
Yes, as long as the property you want to refinance is in a USDA location and you meet the USDA loan requirements.
How can I pay off my USDA loan early?
Since the USDA doesn’t offer shorter-term refinances, you’ll likely need to refinance out of your USDA mortgage and into a conventional loan.
Why might a USDA refinance get denied?
The denial of a USDA refinance could be for many reasons. Whether you haven’t had your current loan for long enough or your credit score isn’t up to par, loan approval isn’t guaranteed. Work with your lender on what you can do now to improve your approval chances down the road.