Homeowners can refinance a USDA loan as long as they’ve made timely payments and meet other lender requirements.
If you’re a homeowner with a U.S. Department of Agriculture-backed mortgage, you might wonder if you can refinance a USDA loan. After all, refinancing your mortgage can save you thousands by securing a lower interest rate or extending your loan term.
Fortunately, the answer is yes. With a USDA refinance, you could eliminate mortgage insurance and replace the loan with a conventional, Federal Housing Administration (FHA) or another USDA-backed loan. You could also pursue a rate-and-term refinance to lower your interest rate and reset your loan term.
Continue reading to learn how to refinance a USDA loan.
What is a USDA Loan?
A USDA loan is a mortgage insured by the U.S. Department of Agriculture, available to individuals purchasing properties in designated rural areas. The USDA provides a map indicating which properties may qualify for this government-backed loan.
Although the federal government insures them, USDA loans are offered through private mortgage lenders approved by the agency. Each lender will have its eligibility criteria; generally, you’ll need a credit score of 620 or higher and a debt-to-income (DTI) ratio of 41% or lower.
Additionally, USDA loans have income caps because they are meant to help lower-income homeowners. Those who make more than 15% of the median income for their area won’t be eligible for this loan type.
The loans can only be used to purchase primary residences.
Can You Refinance a USDA Loan?
“Yes, USDA loans can be refinanced, typically with the USDA Streamlined Assist Refinance or traditional USDA refinancing,” says real estate investor Daniel Cabrera, owner of Sell My House Fast SA Texas.
Homeowners can either apply for and receive another USDA loan, assuming they still meet all requirements, or replace it with a conventional home loan or another mortgage product.
Those who go for the first option can get a USDA Streamlined Assist Refinance Loan, which allows homeowners to lock in a lower interest rate without paying for a house appraisal or closing costs. In most cases, there are also no loan-to-value (LTV) limits or credit checks.
How Does Refinancing a USDA Loan Work?
Refinancing a USDA loan is similar to refinancing any other mortgage. You’ll want to shop around for mortgage lenders and refinance rates, make a refinancing plan and fill out the relevant applications.
Determine Whether You’re Eligible for Refinancing
Verify that you meet the USDA’s eligibility requirements for refinancing its loans, including 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 15% of their area’s median income and have a credit score of at least 620. If you don’t meet refinancing requirements, you can work to raise your credit score or consider a conventional loan for the mortgage refinance.
Find a USDA-approved Lender
Research and contact USDA 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.
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, W-2s, bank statements
- Tax returns
- Verification of employment
Submit Refinancing Application
Complete the refinancing application provided by the chosen USDA-approved lender and submit 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 your income, debts, credit score and mortgage payment history.
Finalize the Refinancing Process
The final step is to review and sign the loan agreement if approved.
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.
The Bottom Line
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 makes sense if you need to extend loan terms or save on monthly payments by reducing the interest rate. You’ll also need to still meet income requirements and other criteria set by the USDA and your mortgage lender.
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For this story, we worked with real estate investor Daniel Cabrera, owner of Sell My House Fast SA Texas.
Frequently Asked Questions
How much does it cost to refinance a USDA loan?
The final cost of refinancing a USDA loan depends on what type of refinancing you choose. In most cases, you’ll have to pay 1% of the loan balance at closing plus a 0.35% annual fee on the outstanding loan balance.
What is the waiting period for a USDA refinance?
The waiting period for a USDA refinance is 180 days after closing on the existing loan, plus 12 months of on-time mortgage payments on the existing loan. If
What is the disadvantage of USDA loans?
The biggest disadvantage of a USDA loan is that it comes with income limits (you can’t make more than 15% of the median income in your area), is only available in designated areas and is only available for primary residences. Additionally, it comes with annual fees.
Sources
- Daniel Cabrera, owner of Sell My House Fast SA Texas
- United States Department of Agriculture, “Eligbility” https://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do
About Anthony O'Reilly
Anthony O’Reilly is an updates editor for Benzinga. He’s won numerous journalism awards for his coverage of the New York City economy and Long Island school district budgets.