Low to medium-income borrowers often benefit from the USDA loan program. With no down payment requirement and flexible guidelines, you can get the USDA loan with little money out of your own pocket. But what happens when you need/want to refinance? What options do you have?
The USDA Streamline Assist Refinance
The USDA started a streamline refinance program, much like the FHA and VA streamline refinance program. It started out as a pilot program that was only available in certain states. Today, it’s available countrywide. Borrowers with on-time payments for the last 12 months may be able to refinance his or her USDA loan with little verification required.
In order to be eligible for the USDA streamline refinance program, you must:
- Already have a USDA loan
- Have made your payments on time for the last year
- If you have one 30-day late payment in the last 12 months, you must have current payments for the last 180 days
- You must have had the current USDA loan for at least one year
- You must prove that you will continue to occupy the home as your primary residence
- Your payment must decrease at least $50
You cannot receive cash out with the USDA streamline refinance. You may refinance the current outstanding principal balance plus any closing costs, the USDA funding fee, and accrued interest. You may not receive any cash in hand, though.
You don’t need an appraisal and the lender doesn’t need to verify your debt-to-income ratio. They do, however, need to make sure that your total household income doesn’t exceed the limit for your area according to the USDA guidelines.
The streamline refinance is good for borrowers that just want to take advantage of lower interest rates and save money every month.
Standard USDA Streamline Refinance
The USDA also offers a standard streamline refinance. While it’s similar to the streamline assist program, it’s not as restrictive. The two main differences include:
- You don’t need to save $50 per month
- You can change or remove borrowers on the loan
The USDA streamline refinance doesn’t require you to get an appraisal, but you must prove your income and the lender must calculate your debt-to-income ratio. The lender must make sure your qualifying factors still fit within the USDA guideline. The one thing you can get away with, however, is you can be underwater (owe more than the home’s worth) and still refinance.
One more difference from the streamline assist program is that you can’t roll the closing costs into the loan. You must pay for them out of your own pocket at the closing.
Finally, the USDA has a non-streamline refinance option. This full refinance works in much the same way the purchase loan, did. You must prove that you can afford the loan. In other words, you must provide:
- Proof of income – Last 30 days of pay stubs and 2 years of W-2s
- Proof of assets – Last two months of bank statements
- Proof of adequate credit – Lender will pull your credit score
- Proof of your home’s value – You’ll pay for an appraisal
You must fit within the USDA guidelines, just as you did with the home purchase. This means a credit score of at least 640, a front-end debt ratio of no more than 29%, and a total debt ratio of no more than 41%. You must prove that you’ll live in the home as your primary residence too.
If you want to roll the closing costs into the loan, the home must be worth enough to do so. You’ll also pay a funding fee upfront, which you can roll into the loan, if there’s enough room. The upfront funding fee for a USDA refinance is 1%, just like it was when you bought the home. If you borrow $200,000, you’d pay $2,000 upfront plus the annual mortgage insurance charged on your loan.
Choosing the Right Refinance Program
So how do you choose the right USDA refinance program? It depends on what you need.
The streamline assist program is strictly for borrowers that want to lower their interest rate and/or save money. You must be able to prove that you’ll save $50 or more on the loan. You can’t change any borrowers on the loan either, so it’s not a good option for a divorce situation. It’s best for those that just need the lower payment.
If you are getting divorced or won’t save $50, but still want to refinance, the streamline option is a good choice. You still get the benefit of little verification required, but you get to refinance your mortgage too. The only difference is you’ll need money for the closing costs, which can be as much as 3% or more of your loan amount.
If you won’t save $50 on your loan, but want the updated appraisal value, you can opt for the full USDA refinance. It has the same fees as the streamline option, but you must fully verify all aspects of your loan. Borrowers that choose this option typically need the updated appraisal value to wrap the closing costs into the loan.
The USDA offers many refinance options today. Discuss your options and see which one suits your needs the most. The streamline assist program will cost the least out of pocket, but is the hardest to get because of its tight guidelines.