Section 6: USDA Loan Refinancing
USDA Loan Refinancing
The USDA Home Loan program provides qualified homeowners with a simple way to take advantage of rates and decrease their monthly mortgage payment. Beyond that, military homeowners can get cash back on a USDA refinance and use the proceeds for a variety of needs, from paying off debt or making home improvements and much more. Now the current economic climate makes a great time or many homeowners to take advantage of the numerous benefits found in a USDA refinance.
To get started, call, or start your USDA Refinance quote online.
When Should you Refinance a USDA Loan?
In general, you should refinance a USDA loan if:
Your Home’s Value Has Gone Up
If you have built equity in your home either by the housing prices rising or paying down your loan it might be a good time to refinance. If you need to lower your interest rate, need cash to pay off debts, or do an additional project on your home then a refinance might be the best option for you.
10 steps to Refinance Your USDA Loan
Most borrowers follow the following USDA refinance steps:
1. Determine if you still need a USDA loan.
The criteria for USDA loans changes each year FHFA sets the conforming loan limits. If your existing loan balance exceeds these limits, a USDA refinance loan may be your only option.
2. Check your credit scores.
Many USDA lenders set the minimum bar at 700 for a USDA loan. That’s 80 points higher than the USDA minimum, so make sure you check your credit score before you apply for a USDA refinance.
3. Make sure your debt-to-income (DTI) ratios are in line.
USDA lenders measure your DTI ratio by dividing your total debt by your gross income, and 45% is the standard maximum. That’s significantly lower than the 50% ratio conforming lenders allow.
4. Shop for the best USDA refinance rates.
Some lenders specialize in USDA loans. Banks may even offer lower rates if you carry large deposit balances with them. Compare loan estimates with at least three to five lenders to make sure you’re getting the best deal.
5. Ask the lender when you can lock in your rate.
USDA lenders may require a loan approval before locking in your rate. USDA rates change daily, so make sure you know your lender’s lock policy to avoid any surprises in the terms of your rate later in the process.
6. Provide your paperwork promptly.
Because USDA lenders don’t allow automated approvals, you’ll have to provide more financial paperwork. USDA loans typically take longer to close than standard loans, because a human underwriter is involved in the decision making and is responsible for ensuring the loan meets USDA investor standards.
7. Keep your cash liquid.
It’s not uncommon for a USDA lender to require proof of six to 24 months’ worth of mortgage payment reserves in a liquid account, meaning it can be easily converted to cash.
8. Plan for a pricey appraisal.
If you’ve got a custom home or a lot of square footage, appraisers may charge more to find comparable homes, and for the extra legwork it will take to measure out and list all the amenities in your home.
9. Notify your escrow officer and loan officer of any trusts in advance.
Lenders want to make sure they can collect on a USDA loan if you default, and they may require extra steps to approve any trust your property is held in. Escrow officers may also need a copy of the trust to properly prepare your closing documents.
10. Review your closing disclosure and close.
Like any refinance, you’ll receive a closing disclosure three business days before your closing. Review the paperwork and make sure the numbers are what you expected. If everything looks correct, your loan documents will be returned to the lender, your old USDA loan balance will be paid off with the funds from your new USDA loan.
USDA Refinance Requirements
. At least 20% equity in your home
. A minimum 700 credit score
. Total debt that doesn’t exceed 45% of your income
. No major credit problems in your recent past, such as bankruptcies or foreclosures
. Full documentation of all sources of income including tax returns, paystubs, CPA letters and IRS validation of all filed tax forms
* Requirements may very program to program and lender to lender
How to Get the Best USDA Refinance Rates
USDA lenders typically set interest rates based on their own standards. Shopping for the best USDA refinance rates could save you thousands or even hundreds of thousands of dollars over the life of the loan.
You’ll typically snag the best USDA mortgage refinance rates if you:
Have a high credit score.
Although 700 is the minimum, USDA lenders may reward higher-credit-score borrowers with lower rates and closing costs.
Don’t borrow the maximum.
USDA lenders may offer a lower rate if you’ve built up substantial equity and just want to refinance to save on your monthly payment (and not tap equity).
Avoid niche USDA loan programs.
Some USDA lenders offer special programs to make USDA refinance qualification easier, such as using bank statements instead of tax returns to prove income. These flexibilities usually require you to pay a premium in the form of a higher interest rate.
Two Great USDA Loan Refinancing Options
Traditional USDA Refinance
A USDA refinance is simple loan backed by the U.S. Department of Agriculture used to refinance or replace an existing mortgage. Like USDA loans, a USDA refinance offers fantastic rates, lower costs, and greater flexibility than other programs.
Cash-Out Refinance
A "Cash-Out" refinance is an option for those with a USDA loan looking to take advantage of their home's equity to access cash for home improvements, emergencies, pay off debt, or any other purpose.
Thinking about refinancing? Speak with an Orbit Home Loan specialist to discuss your options.
USDA Refinance Eligibility
In general, USDA eligibility is based on the buyer and the property. First, the home must be in an eligible rural area, which USDA typically defines as a population of less than 20,000. Second, the buyer must meet USDA monthly income caps. To be eligible, you can’t make more than 15% above the local median income. You also have to use the home as your primary residence (no vacation homes or investment properties allowed).
Borrowers have to meet USDA’s “ability to repay” standards, including:
- Income eligibility: Steady job and monthly income, proven by tax returns
- Credit requirements: FICO credit score of at least 640 (though this can vary by lender)
- Existing debt ratio: Debt–to–income ratio of 41% or less in most cases
To find out if the property you’re buying is a USDA eligible rural area and if you meet local income limits, you can use the USDA’s eligibility maps.
See What You Qualify For