A USDA loan makes it easier for home buyers to purchase properties in rural and suburban areas. The highlights of USDA loans include lower interest rates and the option to put zero money down. As you make more mortgage payments, you may decide that a refinance is right for you. Consumers have many USDA loan refinance options, and this guide will explore your choices.
Can you Refinance a USDA Loan?
You can refinance a USDA loan. The lender will look at your credit score, income, and other details to see if you qualify. Refinancing a USDA loan offers many possibilities.
Reasons to Consider Refinancing Your USDA Loan
Refinancing a USDSA loan can offer many benefits. You won’t get every advantage from one refinance, but you can get more than one of these perks from the same loan:
- Lower interest rates: If rates have dropped, you can secure a lower interest rate by refinancing your mortgage.
- Lower monthly payments: A lower rate will help, but you can also reduce your monthly mortgage payment by extending your loan’s duration.
- Get out of debt sooner: Shortening your mortgage and opting for a 15-year mortgage instead of a 30-year mortgage will get you out of debt sooner. Not everyone can qualify for a 15-year mortgage in the beginning, but you might be eligible in the future if your income and credit improve. A refinance can move you closer to having a debt-free property.
- Cash-out refinance: You will have to turn your USDA mortgage into a conventional mortgage to initiate a cash-out refinance. You cannot refinance if you want to repay your current USDA loan with another USDA loan.
What is a USDA Loan Refinance, and Who is Eligible to Refinance It?
A USDA loan refinance involves swapping your current USDA loan for a new USDA loan. You will end up with a different interest rate and new terms. Here are some additional details about what the process entails and who qualifies.
Current Status of Your USDA Loan
Your current USDA loan will be replaced. You are technically paying off your current USDA loan with the proceeds from the new USDA loan. The rate and terms will be different.
Mortgage Payment History
Lenders want to make sure you have been keeping up with your mortgage payments before letting you initiate a refinance. A good history can increase your likelihood of qualifying for a refinanced USDA loan.
Your Credit Score Requirement
USDA lenders have different requirements, but a 620 FICO score is a common minimum. Raising your credit score leading up to the refinance can help you get approved and secure lower rates. Lenders associate a high credit score with less risk, which can result in better terms.
Your Income and Employment Status
Lenders want to make sure you are receiving steady paychecks to cover the monthly mortgage payment. They want to see that you make enough income, but lenders will also look at your debt-to-income ratio. This ratio measures the percentage of your income that goes toward paying debt.
For instance, someone earning $10,000 per month may appear to have the financial flexibility to afford a $2,000//mo mortgage payment. However, if this same borrower has $6,000 in monthly expenses toward debt, the lender may feel uneasy. These numbers result in a 60% debt-to-income ratio, which will result in a rejection.
USDA lenders have a maximum DTI of 41%. That means a borrower making $10,000 per month cannot spend more than $4,100 per month on financial obligations like personal loans and mortgages.
Types of USDA Refinancing Options
You can choose from three types of USDA refinancing options. These are your choices.
USDA Streamlined-Assist Refinance
You must have had your current mortgage for at least 12 months. You won’t have to worry about a credit check, and some lenders won’t even verify your debt-to-income ratio. It’s possible to get a good rate even if you don’t have the best finances. No home appraisal is required, and you can only select this route if you can reduce your monthly mortgage payment by at least $50. You cannot use a USDA streamlined-assist refinance for a cash-out refinance.
USDA Streamlined Refinance
It’s similar to a streamlined-assist refinance, but your lender will check your credit score and income before approving your application. Your income must be within the USDA’s income limits to qualify for financing. Just like other USDA loans, this refinancing route requires that your property is your primary residence.
USDA Non-Streamlined Refinance
A USDA Non-Streamlined Refinance is the only option on this list that requires an appraisal. The appraisal lets you unlock more equity in your home, which can make you less risky to a lender. For instance, you can end up with a lower loan-to-value ratio that may make a lender feel more confident about working with you.
Pros and Cons of Refinancing a USDA Loan
These are some of the advantages and disadvantages of refinancing a USDA loan.
Pros
- Get a lower monthly mortgage payment
- Reduce your interest rate
- Speed your path to a debt-free property
Cons
- Closing costs
- No cash-out refinance option (get a HELOC or a home equity loan instead)
- You must get a 30-year fixed-rate USDA loan. If you want a 15-year loan, you will have to refinance it as a conventional mortgage or a similar financial product.
How To Apply For a USDA Loan Refinance
Many lenders have websites that let you submit online applications. You can provide your basic details like your name, proof of address, proof of income, and other information. Lenders guide you through the process and let you know which documents you need. It’s a good idea to keep these documents in the same place since most lenders will have the same requirements. A lender should get back to you shortly after you submit an application.
Conclusion: Is Refinancing a USDA Loan Right for You?
Refinancing a USDA loan can be a great move to reduce your interest rate and end up with lower monthly payments. You can even shorten your loan’s duration and get out of debt sooner if you consider conventional mortgages, which let you set 15-year terms.
Most USDA loan refinances keep you in debt longer but free up more space in your monthly budget. It’s important to assess your finances and determine the pros and cons of a refinance. It’s not right for everyone, but it can help. Unlike other types of financing, some USDA refinancing options do not require credit checks or property appraisals.
FAQs About Refinance USDA Loan
You can refinance a USDA loan to a conventional loan. This route makes more sense if you don’t want a 30-year term or prefer to have a variable rate. All USDA loans must be 30-year fixed-rate mortgages.
Borrowers do not have to worry about any prepayment penalties for their USDA loans.
The USDA does not offer a cash-out refinance option. You will have to refinance into a conventional mortgage to initiate a cash-out refinance.
You must wait at least 12 months before you can refinance a USDA loan. You must have also made on-time payments for at least 180 consecutive days leading up to the refinance.
