The LTV or Loan-to-Value Ratio can be a real hurdle when you try to get a mortgage. Oftentimes, the LTV is too high, forcing you to either put more money down on the home if you are purchasing or wait to refinance until the value is higher. The LTV is dependent on the value of the property, which comes from the appraisal. On the USDA Streamline Loan, however, there is no required appraisal, so the USDA Guarantee Fee does not play a role in the LTV.
USDA Streamline loan Program
The USDA Streamline Refinance Loan is a program that enables you to take advantage of a lower interest rate. In fact, one of the requirements of the loan is that you lower your interest rate at least one percent. The other stipulation is that your housing payments for the last 12 months were paid on time. Those are the only two things the USDA cares about in order to qualify you for the USDA Streamline loan.
What the USDA Streamline Loan does not require is for you to have an appraisal. They do not care about the value of your home right now – they allow you to refinance without knowing the value. This is because the only things you can include in the USDA loan are:
- Outstanding principal balance as of the day of the payoff
- The upfront USDA guarantee fee
Since you cannot add closing costs or take any cash out of the equity in the home, the value of the home does not matter.
The Benefit of the USDA Streamline Loan
The USDA offers the streamline loan in order to make it more affordable for borrowers. By lowering your interest rate at least 1 percent, you are able to save a significant amount of money every month. Even if you add the USDA guarantee fee onto the loan, which is 2% of the loan amount, you will likely still save plenty of money every month.
If your interest rate is lower on your loan, it means that you pay more towards the principal of your loan. This is considered a lower risk for the lender since you get the loan paid off faster than you would with the higher interest rate.
The Use of the USDA Guarantee Fee
The USDA Guarantee Fee might seem like another nuisance, but it is a fee with meaning. Without the money the USDA collects from this fee, they would not be able to continually fund their reserve account. Without the reserves, the USDA would not be able to provide affordable mortgage options for low-income families. In fact, the USDA loan allows families to use not only the income of the applicant and co-applicant, but that of every adult household member. The income cannot be used for qualifying purposes, but it can be a compensating factor when determining the overall debt ratio. This is a helpful tool, especially in the rural areas that USDA loans are offered.
Because of this, the USDA needs to charge the guarantee fee to allow it to have funds to pay the banks back that have defaulted loans. The USDA guarantees a portion of each of those loans and when the banks file a claim, the USDA must pay them and then take possession of the home.
The USDA tries to turn around and sell the home to recoup the money they lost on the deal, but this could take time. With the entire process going back and forth, the USDA stands to lose a lot of money and could potentially be unable to provide loans to low-income families without the support of the guarantee fee.
You can think of the USDA Guarantee Fee as an insurance policy to help keep the USDA in business. The good news is, however, that you can roll the cost into your loan and not have to worry about your LTV. Since there is no appraisal, there is no LTV calculation. As long as you can show that you paid your current mortgage on time, the rest will fall into place and you can start saving money right away with the USDA Streamline Refinance.