Can You Refinance a USDA Loan?

You can refinance a U.S. Department of Agriculture (USDA)-backed loan, and it could save you significantly if interest rates are lower. Should you refinance a USDA loan? That depends on your situation and other factors. With a USDA refinance, you could get rid of mortgage insurance and replace the loan with a conventional, Federal Housing Administration (FHA)- or USDA-backed loan. You could 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 Does Refinancing a USDA Loan Work?

Refinancing a USDA loan allows borrowers with an existing USDA mortgage to replace it with a new loan. You could refinance a USDA loan to obtain a lower interest rate, reduce monthly mortgage payments, change from an adjustable-rate to a fixed-rate mortgage or access 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. Or you could choose to refinance the loan with an FHA loan or a conventional, non-government-backed loan. 

Even if you have low or no equity in the home, you could choose USDA streamlined assist refinance loans or a rate-and-term refinance to lower your interest rate and reset your loan terms, giving you greater flexibility.

Refinancing a USDA loan is similar to refinancing any other mortgage. You’ll want to shop around for mortgage lenders, refinance rates, make a refinancing plan and fill out the relevant applications. 

How to Refinance a USDA Loan in 5 Steps

If you’re ready to pursue a USDA refinance, there are a few steps to take. 

1. Determine Whether You Are Eligible for Refinancing

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 prior. You must also meet income criteria that 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 meet refinancing requirements, you can work to raise your credit score or consider an FHA or conventional loan for the mortgage refinance. Find personalization requirements for a USDA refinance here. 

2. Find a USDA-Approved Lender

Research and contact USDA-approved mortgage lenders to find the one that offers the best terms and interest rates for refinancing your USDA loan. You can compare rates of USDA-approved lenders online and reach out to local banks and credit unions. It’s important to compare interest rates before choosing a new lender.

3. Gather Required Documents

Collect 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:

• 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, W2s, bank statements
• Tax returns
• Verification of employment

4. Submit a Refinancing Application

Complete the refinancing application provided by the chosen USDA-approved lender and provide it 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 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’ll need to pay the refinancing closing costs and prepare for the transition from your existing USDA loan to the refinanced loan. 

Before signing, be sure to understand the terms of the new loan and any changes in monthly payments or interest rates. Carefully review the early repayment policy, the 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. 

Options for Refinancing USDA Loans

You have several types to refinance your USDA loan. Here are the most common. 

Streamlined-Assist Refinance

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 quicker and easier. This program is aimed at homeowners with low or no equity in their home. 

To qualify for a streamlined-assist refinance, you must have a USDA mortgage on your home. The home must be your primary residence and located in a rural or suburban area. You need to have made at least 12 consecutive mortgage payments. With a USDA streamlined assist refinance, you are not required to show your credit score or debt-to-income ratio.

Streamlined Refinance

USDA Streamlined Refinance is a refinancing option specifically for borrowers with an existing USDA loan, providing a simplified application process and potentially lower interest rates. 

With a USDA streamlined 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 below 41%. In addition, lenders can reject the loan refinance if your monthly payments aren’t reduced by at least $50.

You can add or remove someone’s name on the USDA mortgage with a streamlined refinance. You only need 180 days of on-time payments for a streamlined refinance.

Nonstreamlined Refinance

USDA nonstreamlined refinance refers to a refinancing option for borrowers with a USDA loan who do not qualify for the streamlined process. A nonstreamlined refinance requires a full underwriting review and documentation similar to the initial loan application. 

With this option, you’ll have to pass a credit check, meet debt-to-income requirements and pay for a new appraisal. There are also additional closing costs associated with a nonstreamlined refinance. You could qualify for a nonstreamlined refinance even if your monthly payments aren’t reduced by at least $50 monthly. 

Conventional Loan Refinance

USDA-to-conventional refinance is a refinancing option for borrowers with a USDA loan who want to switch to a conventional loan, possibly to secure better terms or remove the USDA loan’s requirements, such as mortgage insurance. With a conventional loan refinance, you’ll pay off the existing USDA loan with proceeds from the conventional loan. 

You might choose a conventional loan to refinance if you no longer meet USDA loan requirements or want to avoid paying mortgage insurance. 

Benefits Refinancing a USDA Loan

There are many situations when USDA loan refinancing makes sense. The pros of refinancing a USDA loan include:

1. Lower 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 might 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. Cash-Out Option

Refinancing a USDA loan also offers a cash-out option, allowing you to tap into your home equity and use the money for various purposes, such as home improvements or debt consolidation. It can also allow you to refinance for longer terms, reducing monthly payments.

3. Improved Credit Score

Refinancing a USDA loan can potentially lead to an improved credit score, as borrowers who make timely payments and manage their new loan responsibly can demonstrate good credit behavior to lenders. If the lower payment amount means you can make each monthly payment on time more easily, this can have a significant credit-boosting impact over time. 

Drawbacks of Refinancing a USDA Loan

There are a few drawbacks to refinancing a USDA loan, including costs. Here’s what you will want to weigh against the potential benefits. 

1. Costs Associated with Refinancing

Refinancing a USDA loan can come with various costs, such as closing, application and appraisal fees, which can add up and potentially outweigh the benefits of refinancing. It doesn’t make sense to pay refinancing fees unless your total interest rate or monthly costs are significantly less than you currently pay. 

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 may cause borrowers to lose these advantageous features. This is especially true if you switch from a USDA loan to a conventional loan.

Refinancing a USDA Mortgage

Can you refinance a USDA loan? Yes! Should you refinance? That depends on your current interest rate, the best available rates and the total costs of the refinance. A mortgage refinance can make sense if you need to access equity, extend loan terms or save on monthly costs. To get started, research some of the best refinance rates.

Frequently Asked Questions