Breaking Down the USDA Refinance Loans

Refinancing your mortgage can be an effective way to reduce your monthly payments and lower your interest rate, potentially saving you a lot of money over the short and long haul. Refinancing isn’t just available for conventional mortgage loans, though — you can also refinance government-backed mortgages — like USDA loans — as well.

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    USDA mortgage loans differ quite a bit from conventional loans, especially when it comes to refinancing. The USDA offers programs to make refinancing a seamless process for borrowers, with multiple options to choose from.

    If you’ve been considering a USDA refinance, it’s important to understand how these types of refinances work, the qualifications, and what the perks or potential downsides are. If you know this information, you’ll be well on your way to making the best refi decision for your needs.

    What is a USDA loan? 

    A USDA loan is a type of mortgage offered to home buyers who may not otherwise qualify to get a home loan. These loans are generally available to people who live in rural areas and can’t secure safe and sanitary housing without assistance. USDA loans don’t require a downpayment and generally come with a competitive interest rate.

    The USDA offers two loan programs for single-family homes. The Single Family Home Loan Guarantee is a program in which the USDA backs mortgage loans from approved lenders around the country, making it less risky for these lenders to loan money to non-traditional borrowers.

    The program mitigates risk for those lenders that provide loans to individuals in rural areas who are below a certain income threshold. All loans under this program must have a 30-year fixed rate.

    The Section 502 Direct Loan Program provides loans directly to low-income borrowers who don’t currently have access to decent, safe and sanitary housing. Under this program, the USDA gives borrowers a payment assistance subsidy to help make their mortgage payments more affordable.

    Loans under this program come with a fixed interest rate and a loan repayment term of up to 33 or 38 years, depending on the borrower’s income level.

    Qualifications for a refinancing a USDA Loan

    As with other types of mortgages, USDA loan borrowers may have the opportunity to refinance their loans to lower their monthly payments or take advantage of lower interest rates. USDA refinancing is available to both direct and guaranteed loan borrowers, even if they currently have little to no equity in their home.

    To be eligible for a USDA refinance loan, borrowers much meet the following qualifications:

    • The original mortgage that the borrower is refinancing must be a USDA loan, and the borrower must have been current on their payments for at least the past 12 months.
    • The borrower’s income can’t exceed the limit set by the USDA. The limit varies depending on where you live.
    • All borrowers on the original USDA loan must also be on the refinance loan, though they can also add additional borrowers. 
    • The interest rate of the refinance loan can’t exceed the interest rate on the existing loan.
    • The refinance loan term can’t be longer than 30 years.
    • The new loan must result in at least a $50 reduction to the borrower’s monthly payment when you account for principal, interest, real estate taxes and homeowners insurance.

    Refinancing a USDA loan

    The USDA offers a couple of different options for borrowers looking to refinance a USDA loan. Borrowers may decide to take advantage of these loans to reduce their monthly mortgage payments or to get a lower interest rate, especially during times when refinance rates are especially low.

    The USDA offers a streamlined assist refinance program. This program allows borrowers to refinance their mortgage without a new appraisal, credit application or home inspection. Originally a pilot program, the streamlined assist refinancing is now available nationwide.

    USDA borrowers can also opt for a non-streamlined refinance. This type of loan comes with many of the same advantages and restrictions as the streamlined assist loan, but borrowers must go through a full credit application, debt-to-income ratio check and home appraisal.

    To get started with a USDA refinance, borrowers should apply directly through a USDA approved lender. You can also contact a USDA Guaranteed Loan Coordinator in your area, who can answer any questions you have and walk you through the refinance process.

    Tips on refinancing a USDA loan

    Are you considering a USDA refinance loan to lower your interest rate or monthly payment? The following refinancing tips can help get you started and make the process a bit easier.

    Confirm your income eligibility.

    To qualify for a USDA refinance loan, your income must be below the adjusted annual income limit for your region. Limits vary by location. You can use the USDA income eligibility tool to figure out if you’re eligible.

    Determine which type of refinance you’ll apply for.

    The USDA offers a variety of refinance options to its borrowers. The streamline assist refinance allows you to bypass the credit application, appraisal and inspection, while the non-streamline doesn’t. Decide which type of loan you want before you apply.

    Find an approved lender with a competitive rate.

    Not every lender offers USDA refinance loans. Check the list of approved lenders to see who in your area offers these loans. Once you’ve narrowed it down, shop around to ensure you get the lowest interest rate available.

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    We welcome your feedback on this article. Contact us at inquiries@thesimpledollar.com with comments or questions.

    Reviewed by

    • Angelica Leicht
      Angelica Leicht
      Editor

      Angelica Leicht is a writer and editor who specializes in everything mortgage-related for The Simple Dollar. Her work has spanned topics that include lending product reviews, interest rate trends, racial biases in mortgage lending and the role of fintech in lending practices, and has appeared in publications such as Interest, Bankrate, The Spruce, Houston Press and VeryWell, among others.