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Do you have a USDA mortgage loan? And are interest rates significantly lower than when you bought your home? If so, a USDA refinance could save you quite a bit of money. In this article, we'll go over how to refinance a USDA loan. We'll also discuss the different types of refinancing loans that are available as well as qualification requirements to keep in mind before you apply.
Can you refinance a USDA mortgage loan?
Yes. There's nothing that says you need to keep your original USDA loan forever. It can be a great idea to refinance to take advantage of lower interest rates. You might also be able to get rid of mortgage insurance.
However, there's quite a bit more to the story. For starters, you could refinance a USDA loan with another USDA loan, or replace it with a conventional (not government-backed) loan. You might do what's called a rate-and-term refinance to lower your interest rate or reset your loan term. Or, you might want to take cash out of the home when you refinance. To learn more about refinancing in general, check out our comprehensive refinancing guide.
How to refinance a USDA home loan
To refinance a USDA loan, you'll need to rate shop with a few lenders, decide on the best refinancing option, and then start the application process.
Find the right lender
Our list of the best USDA mortgage lenders is a good starting point. But don't restrict yourself to just USDA loans. Other lenders might also have features that appeal. For example, you may like lenders with a large branch network. Or maybe you're looking for top-notch customer service scores and an all-online application process.
Apply at a few lenders and for a few types of loans
Once you've narrowed down your search to a few great lenders, apply at each one to see what interest rates and loan terms you get offered. It's also a smart idea to compare your USDA refinancing options with conventional mortgage loans.
Decide which is the best refinancing option for you
Different lenders will offer you different interest rates. They also have different closing costs and may even offer you different types of loans. Once you've applied and seen your specific loan offers, the next step is to decide which is the best choice for you.
Apply and submit the required documentation
Once you've decided on the best refinancing option for your USDA loan, you'll need to formally apply. Depending on the type of loan you apply for, it might be a smart idea to have your income documentation handy. Then, simply follow the lender's instructions and complete your refinancing.
Top Mortgage Lenders
It's important to compare mortgage lenders so you understand all your options. Here are a few of our favorite lenders, listed side by side so you can see how they each stack up against their competition:
| Lender | Min. Down Payment | Credit Score | Next Steps |
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Rating image, 4.5 out of 5 stars.
4.5/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
= Best
= Excellent
= Good
= Fair = Poor |
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Rating image, 5.0 out of 5 stars.
5.0/5
Our ratings are based on a 5 star scale.
5 stars equals Best.
4 stars equals Excellent.
3 stars equals Good.
2 stars equals Fair.
1 star equals Poor.
We want your money to work harder for you. Which is why our ratings are biased toward offers that deliver versatility while cutting out-of-pocket costs.
= Best
= Excellent
= Good
= Fair = Poor |
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USDA refinance loan types
Existing borrowers can apply for the following three main types of USDA refinancing loans.
Streamlined-assist
As with other government-backed programs, the USDA's streamlined options offer relaxed requirements and reduced fees. The streamlined-assist is the easiest and most popular USDA refinance option. Here's how it works:
- Most borrowers won't need an appraisal and can roll closing costs into the loan.
- The only credit requirement is that the existing USDA loan has been paid as agreed for at least 12 months prior to the application.
- There is no debt-to-income calculation.
- The maximum loan amount cannot exceed the original loan amount.
- There must be a tangible benefit to the borrower. This is defined as a monthly payment reduction of at least $50. Note: You can use our mortgage calculator to estimate how much you could save.
One big caveat is you can't remove a borrower during a USDA streamlined-assist refinance. So, if your goal is to refinance and remove a co-signer, you'll need to use a different option.
Streamlined
The streamlined-assist and streamlined USDA refinance loans are very similar. However, there are a few differences:
- Streamlined loans don't typically require an appraisal. However, the borrower must meet the USDA's credit and debt-to-income requirements.
- Borrowers can be removed from the loan in a USDA streamline refinance.
- As with streamlined-assist refinances, the maximum loan amount cannot exceed the original loan amount.
Non-streamlined
If you can't reduce your monthly mortgage payment by $50 or want to get a new appraisal, the non-streamlined refinance might be for you.
A non-streamlined loan requires a new appraisal and is subject to full underwriting, with all the paperwork and costs that they involve. Borrowers can be added or removed to the loan, and all borrowers must meet the USDA's credit score and debt-to-income requirements.
Borrowers cannot take cash out of their homes with any of these three USDA refinancing loan types. If you want to borrow more than your current loan and keep the difference, you might want to do a cash-out refinance. You'd need to refinance your USDA loan into a conventional mortgage. Not only could you take cash out of your home equity, but you might also be able to remove mortgage insurance from the loan.
All USDA refinancing mortgage loans are for 30-year terms. If you want to shorten your repayment term, you'll need to refinance into a conventional loan.
USDA loan refinance fees
Like USDA loans used for initial purchases, USDA refinance loans come with a 1% upfront fee and a 0.35% annual fee. And just like any other type of mortgage, you'll likely have to pay some other closing costs.
The good news is that you can roll the upfront 1% fee and all closing costs into the new loan. USDA refinance borrowers don't need to bring any cash to the closing table unless they want to.
Am I eligible for a USDA loan refinance?
To be eligible for any of the three USDA refinancing loan types, your existing USDA mortgage must be at least 12 months old. Most of the other eligibility requirements depend on which option you choose. For a streamlined-assist refinance, you'll need to have paid your loan as agreed for 12 months before you apply. The other loans have a 180-day payment requirement.
Still have questions?
Here are some other questions we've answered:
FAQs
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Yes, there are a few different types of USDA home loans designed specifically to allow existing borrowers to refinance their loans.
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Apply for a refinancing loan with a mortgage lender that offers USDA loan products and complete the lender's application process. If you choose a streamline refinance, the documentation requirements might be minimal. Otherwise, or you may need to verify your income and employment.
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To obtain a USDA refinancing loan, your existing loan must be at least 12 months old. It needs to have been in good standing for a certain amount of time (depending on the type of refinancing). For certain types of refinancing loans, an appraisal might be required, and some require that there's a tangible benefit for the borrower -- specifically, a reduction in their monthly payment.
The Ascent's best mortgage refinance lenders
Refinancing your mortgage could save you hundreds of dollars for your monthly mortgage payment and secure you tens of thousands of dollars in long-term savings. Our experts have reviewed the most popular mortgage refinance companies to find the best options. Some of our experts have even used these lenders themselves to cut their costs.
Our Mortgages Expert
Matt is a Certified Financial Planner™ and investment advisor based in Columbia, South Carolina. He writes personal finance and investment advice for The Ascent and its parent company The Motley Fool, with more than 4,500 published articles and a 2017 SABEW Best in Business award. Matt writes a weekly investment column ("Ask a Fool") that is syndicated in USA Today, and his work has been regularly featured on CNBC, Fox Business, MSN Money, and many other major outlets. He’s a graduate of the University of South Carolina and Nova Southeastern University, and holds a graduate certificate in financial planning from Florida State University.
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