How to refinance your USDA home loan

Valencia Higuera
The Mortgage Reports contributor

Can you refinance a USDA loan?

USDA loans — mortgages backed by the U.S. Department of Agriculture — can be refinanced just like any other home loan.

As long as your credit is decent and your loan payments are up to date, you should be able to refinance into a lower rate and monthly payment.

Qualified homeowners can even skip the credit and income approval step using the USDA Streamline program.

The main challenge to refinancing a USDA loan is that not all mortgage lenders offer them. So shop around to find a few lenders that do, and compare interest rates to get the best deal on your new loan.

Check your USDA refinance options (Jun 20th, 2021)

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USDA refinance options

Refinancing a mortgage involves applying for a new home loan to replace your existing home loan. 

Most homeowners refinance to lock in a lower mortgage rate and reduce their monthly payments.

But refinancing can also help you:

  • Cash-out home equity
  • Stop paying for mortgage insurance
  • Switch loan programs
  • Pay off your house sooner
  • Remove someone’s name from the loan

If you currently have a USDA home loan, you have several refinance options. The right one for you will depend on your end goal.

It also depends on what type of loan you can qualify for based on your credit, home equity, and current loan standing. Here’s what you should know.

USDA Streamlined-Assist Refinance

A USDA Streamlined-Assist Refinance is a simplified refi process. It’s usually the best option if you’re looking to lower the rate and payments on your home loan. 

The big benefit to a USDA Streamlined-Assist Refi is that there’s no credit approval required.

That means the lender doesn’t have to verify your credit score, credit report, or debt-to-income ratio. (Though some do anyway, so ask about a lender’s guidelines before applying.)

With the Streamlined-Assist refinance, you might qualify for a lower interest rate even if your finances aren’t in the best shape.

In addition, you can refinance your home with little or no equity. There’s no home appraisal required, so you may be able to refinance even if your home’s value has fallen and the new loan amount exceeds it.

To qualify, the refinance must reduce your monthly payment by at least $50.

USDA Streamlined-Assist Refinance requirements include:

  • No new credit check or debt-to-income requirements
  • Refinancing the mortgage must reduce the monthly payment by at least $50
  • Borrowers can finance the principal, interest, closing costs, and upfront guaranteed fee into the new loan balance
  • The current USDA loan must be paid on time for 12 consecutive months prior to the refinance request
  • One original borrower must remain on the new loan
  • A new appraisal is only required when a direct loan borrower receives a subsidy
Check your eligibility for a USDA Streamlined-Assist Refi (Jun 20th, 2021)

USDA Streamlined Refinance

Similar to the Streamlined-Assist Refinance, the Streamlined Refinance doesn’t require a new appraisal (unless you’re a direct borrower who receives a subsidy).

The difference is that this option requires credit approval. Your lender will need to check your credit report, credit score, and income before approving your refinance.

Guidelines for the USDA Streamline Refinance include:

  • Borrowers must meet the USDA‘s credit and income eligibility requirements
  • Borrowers can finance the principal, interest, closing costs, and upfront guaranteed fee into the new loan balance
  • The current USDA loan must be paid on time for 180 consecutive days prior to the refinance request
  • The borrower must have had the current mortgage for at least 12 months prior to the refinance request
  • One original borrower must remain on the new loan, with an option to add a new borrower
  • A new appraisal is only required when a direct loan borrower receives a subsidy
Verify your USDA Streamline Refinance eligibility (Jun 20th, 2021)

USDA non-streamlined refinance

USDA loan holders also have the option to do a traditional, or non-streamlined refinance.

A USDA non-streamlined refinance requires a new appraisal, full income review, and credit check.

However, this is an option if you want to avoid the $50 monthly payment reduction requirement.

Guidelines for a traditional USDA refinance include:

  • Borrowers must meet the USDA’s credit and debt-to-income requirements, subject to full underwriting
  • Borrowers can finance the principal, interest, closing costs, and upfront guarantee fee into the new loan balance (up to the new appraised value)
  • The current mortgage must be paid on time for 180 consecutive days prior to the refinance request
  • The borrower must have had the current mortgage for at least 12 months prior to the refinance request
  • One original borrower must remain on the loan, with an option to add a new borrower

USDA-to-conventional refinance

For some homeowners, it will make more sense to refinance out of their USDA loan and into a different loan type — usually, a conventional loan.

There are three main reasons you might refinance from a USDA mortgage to a conventional loan.

  1. To remove mortgage insurance
  2. To shorten the loan term
  3. To cash-out home equity

To refinance from a USDA loan into a conventional one, most lenders will require at least 3% equity.

If your goal is to remove mortgage insurance, you’ll need at least 20% equity.

The lender will require a new home appraisal to compare your home value to your current loan balance to arrive at available equity.

You must meet also meet debt-to-income requirements for a conventional loan as well as the minimum credit score requirement, which is typically 620.

Check your conventional refi eligibility (Jun 20th, 2021)

Remove mortgage insurance

All USDA borrowers pay an upfront guarantee fee and a monthly guarantee fee. 

The monthly guarantee fee is a form of mortgage insurance. This is similar to private mortgage insurance (PMI) with a conventional loan. 

The difference, though, is that conventional home lenders waive PMI once a property has about 22% equity. Mortgage insurance with a USDA is for the life of the loan. 

However, once your property has 20% equity, you can refinance your USDA loan to a conventional loan and eliminate mortgage insurance.

This will lower your payments and total loan costs by removing the extra MI charge on your monthly mortgage bill.

Shorten the loan term

USDA only allows refinancing into a 30-year, fixed-rate loan.

For homeowners who have had their current loan a long time, starting over at 30 years might actually increase their total interest costs.

To lower your total costs, or even pay off the loan sooner, you might refinance into a conventional loan. Conventional mortgage terms allow 20-, 15-, and even 10-year loans.

However, the monthly payment on a shorter loan term is significantly higher. So this is not the right move for someone looking to lower their monthly payment.

Cash-out refinance

Some people refinance and borrow cash from their equity, which is known as a cash-out refinance.

But while conventional, VA, and FHA loans allow cash-out refinancing, USDA loans do not.

In order to tap home equity, you’ll likely have to refinance from a USDA loan to a conventional one. You’ll need at least a 620 credit score and more than 20% equity to make the cash-out refi worthwhile.

Homeowners with credit below 620 but more than 20% equity might use the FHA cash-out mortgage. But be warned that FHA loans come with higher upfront and annual mortgage insurance premiums than USDA loans. So your payments may actually increase.

Check your cash-out refinance eligibility (Jun 20th, 2021)

Pros and cons of a USDA home loan refinance

Refinancing from one USDA loan to another can be a good idea, especially if all you want is a lower rate and payment.

Pros of a USDA refinance:

  • Streamlined Refinancing is typically faster, easier, and cheaper than a traditional refinance
  • No new appraisal for a Streamlined Refinance means you don’t need any home equity to qualify
  • USDA’s upfront guarantee fee is cheaper than FHA’s upfront mortgage insurance
  • USDA loans often have lower interest rates than conventional loans
  • You can refinance a USDA loan if you’re underwater, meaning you owe more than the value of your home
  • A high debt-to-income ratio and low credit score isn’t an issue with a USDA Streamlined-Assist Refinance
  • You can roll closing costs into your new loan balance and eliminate this out-of-pocket expense

However, depending on your credit and financial goals, a different refinance option might make more sense.

Cons of a USDA home loan refinance:

  • You can’t cash out your home equity
  • You can’t shorten your loan term; you can only choose a 30-year, fixed-rate loan with a USDA refinance
  • USDA loans have higher minimum credit requirements. You need a minimum credit score of 640, compared to a minimum score of 620 for a conventional loan and 580 for an FHA loan
  • Refinancing a USDA loan requires paying the 1% upfront guarantee fee again

I was told I can’t refinance my USDA loan?

Maybe you contacted a lender advertising low rates, only to be told you can’t refinance your USDA loan.

There are a number of reasons this might happen.

For one, the lender simply might not offer USDA home loans. Not all lenders do, so you’ll have to shop around for one that does.

The good news is that you won’t have to look far. Many banks, credit unions, mortgage companies, and online lenders are approved to originate these loans nationwide.

For starters, you can check out the USDA’s list of approved lenders by state. 

If you meet the requirements for a USDA refinance but a lender denies you, try again with a different company.

You might also run into issues if you don’t meet the basic requirements of your chosen refinance program. 

For example, a lender might deny your Streamlined Refinance if your mortgage is less than 12 months old or you haven’t made payments on time.

Or, maybe you’re trying to refinance a USDA loan to a conventional loan without enough equity. 

Speak with the lender to figure out the exact problem. If you’re unable to refinance at this time, you might be eligible in the next 6 to 12 months.

If you meet the requirements listed above but a lender still denies your refinance, try again with a different lender.

Mortgage companies can set their own lending requirements, so there’s a chance you find one willing to refinance your mortgage even though the first lender you spoke with wouldn’t.

Check your USDA refinance options (Jun 20th, 2021)

USDA refinance FAQ

How soon can you refinance a USDA mortgage?

If you’re refinancing a USDA loan to another USDA loan, your existing mortgage typically needs to be at least 12 months old (with on-time payments for the past 6 months).

If you want to switch from a USDA loan to a conventional loan, you may be able to refinance right away.

However, you’ll likely need a minimum of 3% equity in the home. So you might have to wait to refinance if you took advantage of USDA’s zero-down-payment allowance.

Does PMI go away on a USDA loan?

USDA loans don’t have private mortgage insurance or ‘PMI.’ But borrowers do have an annual fee (paid in installments monthly) that acts as mortgage insurance. This fee lasts for the life of a USDA loan. 

Once the home has at least 20% equity, you may be able to refinance your USDA loan to a conventional loan and get rid of your mortgage insurance.

What is a USDA Streamlined Refinance?

A USDA Streamlined Refinance is a simplified refinance program that often doesn’t require a credit check, income verification, or home appraisal. It’s a good option for simple rate-term refinances on existing USDA loans.

If you’re underwater or have little to no equity, you can apply for the USDA’s Streamlined-Assist Refinance program.

Does USDA allow cash-out refinancing?

USDA home loans don’t allow cash-out refinancing. If you’re looking for a cash-out refinance, you’ll need to refinance your USDA mortgage into another type of home loan, such as a conventional loan.

Do USDA loans cover closing costs?

To reduce homeowners’ out-of-pocket costs, the USDA allows borrowers to roll closing costs into the new loan balance for Streamlined and non-Streamlined refinances. This is usually not an option for home buyers (unless your home value is greater than your purchase price) — only refinancers.

How much equity do you need to refinance a USDA loan?

USDA loan refinance programs don’t have a loan-to-value ratio limit, so the program allows borrowers to refinance even with little to no equity. If you’re underwater, you’ll need to apply for a Streamlined-Assist Refinance.

To refinance a USDA loan to a conventional loan, the lender may require a minimum 3% equity. You’ll need at least 20% equity to eliminate mortgage insurance.

Why would a USDA loan get denied?

Lenders can deny a USDA refinance for a variety of reasons. For example, if your new loan payments aren’t reduced by at least $50 per month, you wouldn’t meet the threshold for USDA’s Streamlined Refinance program.

Lenders might also deny your refinance if you haven’t had the existing USDA loan for at least 12 months.

And keep in mind that some USDA refinance programs require a new review of your credit and debt-to-income ratio. If your credit score falls below 640, or if your debt-to-income ratio exceeds 41%, the lender might deny your application.

Can you refinance out of a USDA loan?

Yes, you can refinance out of a USDA loan to another type of loan, including conventional, FHA, or VA. Different mortgages have different requirements, so you must meet the minimum requirements of the new loan program. 

Your equity, credit score, debt-to-income ratio, and loan-to-value ratio influence whether you’re able to qualify for another type of mortgage. 

What are today’s USDA refinance rates?

Mortgage rates are low across the board, and USDA loan rates are no exception.

If you’re eligible for a USDA Streamlined Refinance, you may even be able to lower your rate without the hassle of a credit check or home appraisal.

Check your rates and eligibility to see what you qualify for.

Verify your new rate (Jun 20th, 2021)