If you have a USDA loan and want to take advantage of lower interest rates, you can refinance your USDA mortgage with a new one, always with the Department of Agriculture guarantee. A USDA refinance will lower the monthly mortgage payments and help the household’s finances.
When you get a USDA mortgage to buy a new property, there may be a moment when you find the interest rate too high compared to the current market interest rates. Thankfully, you can refinance your home loan to lower your interest and pay back your mortgage with better loan terms and conditions, by choosing one of the available USDA refinancing options.
USDA Mortgage Refinance Guidelines
Credit score and debt-to-income ratio
During the refinance process, the mortgage lender will run a credit check to appraise if the borrower meets the debt-to-income ratio and credit requirements.
Lenders require a credit score above 620 and ideally above 640 to qualify for a USDA refinancing program. As for the debt-to-income ratio for a USDA mortgage refinance it must not exceed 46% — and anything lower than that is better.
USDA to USDA mortgage
If you need to refinance with a USDA mortgage, the initial mortgage must be a USDA one. You can’t refinance a conventional housing loan, a VA loan, or an FHA loan with USDA refinancing loans.
Home equity
Home equity is defined as the portion of a home’s current value that the owner possesses. When the money you owe on your mortgage is less than the value of your home, then your home equity is positive. When the money you owe is more than the value of your house, then your home equity is negative.
When you refinance your USDA loan, it doesn’t matter if your home equity is positive or negative. In both cases, you can get a USDA mortgage refinance.
Cash-out
You can’t cash out with a USDA mortgage refinance. A refinance with a cash-out option means you benefit from the positive equity on your home and take the cash from the difference, which you can use to finance whatever you want. In the case of a USDA mortgage refinance, you don’t have that option. The maximum loan amount you can borrow is the amount left from your existing USDA loan and closing costs.
Current USDA mortgage payments
To qualify for USDA mortgage refinance, the borrower must have the existing USDA loan for at least 12 months and the mortgage must be current for the last 180 days.
Income eligibility requirements
To obtain USDA mortgage refinance, borrowers must have low to median income. The household income limit for most of the U.S. is set at $103,500 for a family of 1-4 (as of 2023). As a general rule, USDA income limits apply to all people living in the home and receiving income, even if they are not listed on the loan application.
USDA mortgage refinance types
There are two main USDA refinance options: the USDA Streamline refinance and the USDA standard refinance.
USDA Streamline refinance
This is the most popular and the most common USDA mortgage refinance option. This refinance program doesn’t require a new home appraisal. The main requirement for this refinance mortgage is that the reduction in the principle and interest is at least $50.
For the USDA Streamlined-assist refinance, income information is needed to determine eligibility, but no other documents are needed. This means that there is no further home appraisal required when applying for a USDA Streamlined refinance mortgage.
USDA Standard refinance
The USDA Standard refinance doesn’t have the $50 reduction requirement. If your expected USDA mortgage reduces your monthly payments by less than $50, you can apply for a USDA non-streamlined refinance mortgage. In this case, the borrower must submit a new appraisal for the home. Some USDA loan holders opt for this loan type to get a new appraisal, once paid.
For the regular USDA refinance option, the application process requires that the borrower must provide verification of employment, which is filled out by the employer, the most recent 2 years of W-2 forms or 1099 Forms, and tax returns. Any large deposits that don’t seem to be from the employer on file — or are not marked as payroll at all — will need to be sourced with an accompanying letter of explanation, as this is required to ensure there isn’t any hidden income.
All of these items will be needed by the underwriter to clear asset and income conditions.
Benefits of a USDA Mortgage Refinance
So, not only can you refinance a USDA rural development loan but doing so has many benefits, from lower monthly payments to mortgage insurance reduction.
Lower monthly payments
When you refinance a USDA loan, you reduce your monthly mortgage fee thanks to the lower interest rate. This can result in significant savings over the life of the loan.
Fixed interest rate
USDA loan refinance comes with fixed interest rates. Homeowners won’t have to worry about them in the future and get the benefit of the lower interest rate.
Mortgage insurance reduction
USDA refinance programs may offer a reduced monthly mortgage insurance premium, if the loan was closed prior to October 1, 2016.
Refinance fees can be rolled into the loan
USDA refinance mortgages come with closing costs to create a new escrow account. Luckily, these can be rolled into the new loan so that the borrower doesn’t have to pay upfront for these fees and costs.
Trust Society Mortgage for Your USDA Mortgage Refinance
In the ever-evolving landscape of mortgage lenders and loan options, USDA loans stand out as a beacon for homeowners seeking to refinance their homes in rural or suburban areas.
Once you learn the nuances of loan types can be challenging. From the upfront guarantee fee to the intricacies of the streamlined assist refinance, you need a trusted partner by your side. Our mission is to ensure that every homeowner, regardless of their state or financial background, has access to the best refinance loans available.
If you’re contemplating whether to refinance your mortgage or curious about how USDA refinance loans can benefit you, remember that the goal is always to align with your financial aspirations.
While the journey of refinancing can seem daunting, with the right NMLS-certified partner, it becomes a seamless process. At Society Mortgage, we’re more than just a company; we’re your ally in achieving your homeownership dreams.
Whether you’re looking to buy a house or refinance your current one, let us be your guide in navigating the world of USDA home loans. Contact us today — we’ll help you find the best mortgage refinance program for your needs and guide you through the pros and cons of different options for refinancing your mortgage.
Frequently Asked Questions
Who is eligible for a USDA mortgage refinance?
To be able to refinance your current mortgage with a USDA refinance loan, the property must be the homeowner’s primary residence and located in a qualifying rural or suburban area. The homeowner must also meet certain income restrictions and have a current USDA loan, with on-time payments.
Can I take cash out with a USDA refinance?
No, the USDA refinance program does not offer a cash-out option. It is primarily designed to reduce loan rates and monthly payments on the original loan amount. However, with lower monthly payments you improve your personal finances and may thus have more disposable income to pay off debts or spend however you want.
If you are looking for a cash-out refinancing program, contact us and we can propose the right cash-out refinance loan for your case.
Can I refinance a conventional loan with a USDA mortgage refinance loan?
Borrowers who hold a conventional mortgage loan can’t proceed with refinancing their existing loan into a USDA home loan. To utilize the USDA loan program, individuals must already possess a USDA 502 Direct loan or Guaranteed home loan.
Can a USDA loan be refinanced?
Yes, a USDA loan can be refinanced with a new USDA mortgage, offering opportunities to lower interest rates and monthly payments, subject to eligibility criteria and guidelines set by the Department of Agriculture.
What is the waiting period for USDA refinance?
The waiting period for USDA refinance typically requires borrowers to have had the existing USDA loan for at least 12 months, with the mortgage being current for the last 180 days.
Can you switch from a USDA loan to a conventional loan?
No, it’s not possible to switch directly from a USDA loan to a conventional loan through a USDA refinance. Borrowers must already possess a USDA loan to qualify for a USDA refinance. If a borrower wishes to switch to a conventional loan, they would need to pursue traditional refinancing options available for conventional loans.
