3 Types of USDA Refinances

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USDA loans are a popular choice for many low to middle-income families. They’re available without a down payment and have much more lenient lending requirements than other home loan products. USDA loans allow those who might not be able to qualify for conventional lending to become homeowners.

However, if interest rates drop, you might be curious if it’s possible to refinance a USDA loan. Keep reading as we answer this question and explore the different types of USDA refinances available. 

Can You Refinance a USDA Loan?

If interest rates have dropped since you first took out your mortgage, you might be interested in refinancing your USDA loan to reduce your monthly payments. Fortunately, like other loan products, you can refinance a USDA loan.

However, like any other refinance, certain requirements must be met. This includes having an acceptable credit score and being current on your existing mortgage.

Unfortunately, the biggest obstacle for many who try to refinance a USDA loan is finding a lender with available options.

Types of USDA Refinances

Before you begin your USDA refinance, it’s important to understand your options. Here’s an overview of the three different types of USDA refinances available.

USDA Streamlined-Assist Refinance

While the typical home refinance can take weeks or even months, a USDA Streamline-Assist refinance was designed to speed up the process. 

The biggest upside to a USDA Streamlined-Assist refinance is that you won’t be required to go through the credit approval process again. This means your lender won’t be checking your credit score, they don’t care about your debt-to-income ratio, and if you have a late payment on one of your other bills, it won’t hurt your approval odds.

Plus, there won’t be an appraisal before closing on your loan, so you can still refinance even if you have little equity in the home. 

Before moving forward with a USDA Streamlined-Assist refinance, you should know a few requirements.

  • When you refinance, there must be at least a $50 reduction in your monthly mortgage payment. 
  • You must have made 12 consecutive on-time mortgage payments before starting the refinance process.
  • You can include closing costs and the upfront USDA guaranteed fee into the loan balance.
  • You can only remove borrowers from the loan if they have passed away. However, you can add anyone to the loan during the refinance.
  • There will be no required appraisal on the home unless the Direct Loan borrower receives a subsidy.
  • The home must still be the borrower’s primary residence.

USDA Streamlined Refinance

USDA Streamlined refinance is going to be very similar to a Streamlined-Assist refinance. While you won’t need to have your home appraised, you will need to go through a credit and income check. 

If you use a USDA Streamlined refinance, you’ll want to be aware of the requirements.

  • You’ll need to meet credit requirements set by the USDA.
  • Your household income must fall within the USDA income limits.
  • You must have been current on your mortgage payments for the past 180 days before applying for refinancing.
  • You must have held the previous mortgage for at least 12 months before refinancing.
  • There will be no required appraisal on the home unless the Direct Loan borrower receives a subsidy.
  • You can include closing costs and the upfront USDA guaranteed fee into the loan balance.
  • The loan amount must not exceed the original loan amount.
  • The home must still be the borrower’s primary residence.
  • Borrowers can be added or removed as long as one of the original borrowers remains on the loan.

USDA Non-Streamlined Refinance

A USDA Non-Streamlined refinance isn’t as simple as the first two options. However, with a non-streamlined refinance, the requirement for at least a $50 reduction in your mortgage payment is removed.

However, you’ll need to go through a full approval process where the lender will pull your credit report, check your credit score, and verify your income. You will also need to have an appraisal done on your home.

This means the refinance process on a non-streamlined refinance will take a little longer.

You’ll want to know the requirements if you choose to use a USDA non-streamlined refinance. Many are the same as the other refinancing options.

  • Borrowers will need to meet the USDA’s requirements for credit and income. 
  • Borrowers must have had their current mortgage for at least 12 months.
  • You must have been current on your mortgage payments for the past 180 days.
  • You can add or remove borrowers, but one of the original borrowers must remain on the loan.
  • The home being refinanced must be the primary residence.
  • You can finance the closing costs and upfront guarantee fee into your mortgage.

Pros and Cons of Refinancing a USDA Loan

Before you move forward with refinancing your USDA loan, it’s important to consider the pros and cons.

Pros

  • You can finance your closing costs and upfront guarantee fees
  • With a USDA Streamlined-Assist refinance, you can avoid the credit approval process.
  • You won’t be required to have an appraisal when using a USDA Streamlined or Streamlined-Assist refinance.
  • You can refinance even if your home has no equity or negative equity.

Cons

  • USDA refinancing doesn’t allow you to cash out equity in your home.
  • If your income is greater than when you applied for your current mortgage, you may no longer qualify for a USDA loan.
  • You can’t reduce your loan term so that you can pay off your mortgage sooner. USDA loans are only available in 30 year terms.

The Bottom Line

If interest rates have fallen since you took out your USDA loan, you may want to refinance to lower your monthly payment. Luckily, refinancing a USDA loan is possible and can even be done if you have little equity in your home.

Sean Bryant

Sean Bryant is a Denver-based freelance writer specializing in personal finance, credit cards, and real estate. With more than 15 years of writing experience, his work has appeared in many of the industry’s top publications including Time and Investopedia . He holds a Bachelor of Arts degree in economics.

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