Borrowers often refinance in order to save money. This was not always the case with the USDA loan, though. Because of the hefty fees to obtain a USDA loan, many borrowers could not refinance. This year things changed drastically for USDA loan holders. Not only did the fees decrease for USDA loans, but they opened up a pilot program, which made refinancing possible in many areas of the country. The USDA initially offered the pilot program to very few areas, but has since opened it up to a majority of the country.
USDA Refinance With no Verification
The first bit of good news is the way the USDA Refinance works. If you currently have a USDA loan, you can streamline refinance into another one. The even better new is you have to verify very little to obtain approval. Here’s how it works:
- No income verification is necessary
- The lender does not need to pull your credit
- You don’t need a new appraisal
- You must save at least $50 per month
- You cannot have any late mortgage payments in the last 12 months
- You can include the outstanding principal, new funding fee, and closing costs in the loan
- It must be your primary residence
This means you have to provide very little verification to gain approval. Instead, you need to prove you could afford the loan you currently hold. This is why they require no late payments in the last 12 months. If you had any late payments, you have to wait until a full 12 months goes by with no late payments. This is incentive to do what you can to get your mortgage payments made.
Underwater Homeowners Win
This program allows underwater homeowners to refinance. This can be great news to those who thought they would never get out of their high interest rate. If the value of your home dropped significantly and you owe more than the home is worth, you can still refinance. You just have to make sure you have timely payments. No matter how hard it is to get those payments made, you need a solid 12 months of timely payments before you can refinance with the streamline program.
Saving on Fees
Another way homeowners can save with a USDA Refinance is with the lower fees. As of October 1, 2016, the fees decreased to 1% upfront and 0.35% monthly. This means you pay 1% of your loan amount with a new purchase or refinance. This is vastly different to the fees prior to this year, which were between 2.5-3%!
For example, a homeowner with a loan balance of $100,000 would pay $1,000 upfront to refinance his loan. If he was able to lower his interest rate, the $1,000 gets figured right into the loan amount and he saves money every month. He will break even much faster with a $1,000 fee than he would when the fees were much higher. This makes refinancing make sense for many more homeowners.
The new monthly fees are 0.35% of the outstanding loan amount. The USDA bills the lender annually for this month, basing the amount due on the average outstanding balance for the year. Prior to October of this year, borrowers paid 0.5%. This again is more savings for the borrowers who refinance.
Borrowers who choose to refinance automatically start saving with the lower monthly mortgage insurance rates. This can help to contribute to the $50 minimum savings they would have every month. Most borrowers can greatly exceed this threshold, making refinancing well worth it in the end.
Qualifying is Easier with a USDA Refinance
It was probably not very difficult for you to obtain approval for your initial USDA loan. It is one of the more flexible loan programs available out there. As long as you don’t make more the allowed income amount for your area and your debt ratios are around 29/41, the program is easy to obtain. The USDA refinance is even easier, if you can believe it!
Because you don’t have to provide any income, credit, or value verification, the lender does not have to go through a long process to approve you for the loan. Basically, as long as you save money every month and you paid your mortgage on time for the last 12 months, you will obtain approval.
There are certain lenders who have stricter guidelines, however. Make sure you shop around with various lenders to find one who will approve you for the loan with very little verification. In addition, make sure you compare the offers you receive. Each lender can charge the interest rate and closing costs that they see fit. This means some lenders may have much higher costs and interest rates than others.
If you currently have a USDA loan, it is worth determining if you qualify for a USDA refinance. You likely stand to save a significant amount of money with the lower monthly mortgage insurance requirements alone. If your current interest rate is higher than today’s interest rates, this will further your savings. The closing costs and other fees that go along with the program are rather minimal because there is not a lot of work involved. The process goes faster than the original process too, helping you to be well on your way to saving money with your new USDA loan!