You have a USDA loan but want to refinance. Maybe you want a lower rate or you need cash out of your equity. The good news is the USDA has several refinance options for you. What you need and how much you want to verify determines which program is right for you. No matter which program you choose, the USDA program offers simple and effective ways to refinance your USDA loan.
The Newest USDA Refinance
The USDA rolled out a Streamline Refinance in just a few states at first. This program helps borrowers lower their mortgage payment. That is the sole purpose of the program. You can’t take cash out of the equity of your home. You qualify based on your mortgage payment history and not much else. The USDA doesn’t require lenders to verify your income, assets, or even the value of your home. This means you could even owe more than your home is worth and still get the loan.
The focus for this program is on your housing payment history. The lender looks back at the last 12 months to see if you made your payments on time. The USDA does allow one late payment during the last 12 months. Some lenders won’t allow that, though. It is best if all of your payments were on time.
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You must also prove to the lender that you will continue to occupy the home as your primary residence. The USDA program was designed to help families secure housing that otherwise would be unable to do so. If you plan to rent the home out or use it as a second home, you would not be eligible for this program.
The idea behind the USDA Streamline Pilot Loan is to help borrowers afford their payment. If interest rates dropped since you took out your USDA loan, you stand to save money. If you proved you can afford your current payment, a lower payment will be even easier to afford.
The amount you can refinance with this loan is strict. You can’t take cash out of the equity. The only amount you can refinance is the outstanding principal balance plus any closing costs the USDA allows. You can also include the USDA funding fee, which is 0.5% of the loan amount.
One stipulation of this loan program, though, is you can’t change who is on the loan. If you got divorced or just want someone off the loan, you can’t do it with this program. You would need to use the USDA’s other streamline program or a fully verified refinance. We discuss both options below. Today, this program is widely available in many states.
Regular USDA Streamline Refinance
The USDA also has another streamline program that is available everywhere. It was more popular in the past when the pilot program was only available in a few states. Today it is available in most states, though. The standard streamline program has a few key differences. Most notably, the lender must pull and verify your credit. There isn’t a minimum credit score, but the lender must look at your payment histories. They must also look at your debt ratios. However, they can use the income you used to qualify for the original USDA loan. They compare this amount to the debts reporting on your credit report.
You don’t need a new appraisal for this loan, either. It is still streamlined. The largest exception is the lender must pull your credit. One key difference however, is you can add or delete borrowers from your loan. The USDA does require at least one original borrower to remain on the loan, though.
As far as closing costs go, you can’t roll them into your loan with this program. You can roll the 0.5% funding fee into the loan though. Because you need money to close on the loan, you will have to verify your assets. The lender needs to make sure you can afford the closing costs and that the money comes from your own accounts.
Regular USDA Refinance Options
Of course, you always have the option to have a fully verified USDA refinance. Among the refinance options, this is the least popular. Usually borrowers that use this one are those that need cash out of the equity of their home. You must verify every aspect of your loan application with this loan. This is similar to what you went through with your original USDA loan.
You must provide:
- Credit score
- Income documentation
- Asset documentation
- Employment verification
- Value of your home
The lender will verify that your debt ratio doesn’t exceed 29/41. They will also verify that your income is consistent, the value of your home is high enough, and that you make your payments on time. You can take as much cash out of your equity as the value of your home. You can’t go over the value though. If you roll closing costs into the loan this takes away from the cash you can receive.
Deciding between your refinance options for the USDA loan is a personal decision. Why do you want to refinance? Do you need cash? If so, you need the full USDA refinance. If you don’t need cash but just want a lower payment, you may be able to use the pilot program. If you want to roll your closing costs into the loan, you will need the pilot program. Check with your local USDA lenders to see if it is available in your state yet. No matter which program you choose, the USDA program is a great, affordable program!
