How to refinance your USDA home loan

Valencia Higuera
Valencia Higuera
The Mortgage Reports Contributor
September 17, 2021 - 15 min read

Can you refinance a USDA loan?

USDA loans, which are 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.

Qualifying 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.


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USDA refinance: Key takeaways

There are quite a few options to refinance a USDA home loan. But most borrowers will use one of two programs:

  1. The USDA Streamlined-Assist Refinance to lock in a lower rate and payment with minimal paperwork
  2. A conventional loan refinance to remove mortgage insurance payments or take cash out

To refinance via the USDA program, you typically need to have had your current loan for at least a year. But a conventional loan might allow you to refinance sooner.

With rates still near record lows and home equity increasing nationwide, it’s a good time to check your refi eligibility.

USDA refinance options

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

A new loan gives homeowners a chance to lock in a lower interest rate and reduce their monthly mortgage 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 Rural Development home loan – whether a USDA Direct or a USDA Guaranteed 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 about USDA refinance options.

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 even if you have 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 for this Streamline Refinance program, your new loan must reduce your monthly mortgage payment by at least $50.

USDA Streamlined-Assist Refinance requirements:

  • 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 USDA guarantee fee into the new loan balance
  • The current USDA loan must be paid on time for 12 consecutive months prior to the refinance request
  • Borrowers can be removed from the loan only if they’re deceased, but a new co–borrower can be added
  • A new appraisal is required only when a Direct Loan borrower receives a subsidy
  • The home must be used as the borrower’s primary residence
  • The borrower must still earn less than the USDA’s income limits

USDA Streamlined Refinance

Similar to the Streamlined–Assist Refinance, the Streamlined Refinance loan doesn’t require a new appraisal (unless you’re a USDA Direct Loan borrower who receives a subsidy).

But this Streamlined option does require credit approval. Your lender will need to check your credit report, credit score, and income before approving your refinance.

Guidelines for the USDA Streamlined Refinance include:

  • Borrowers must meet the USDA‘s credit requirements
  • Borrowers can finance the principal, interest, closing costs, escrow fees, and upfront guarantee 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
  • Borrowers can be added and removed from the loan as long as one original borrower remains
  • A new appraisal is required only when a Direct Loan borrower receives a subsidy
  • The home must be used as the borrower’s primary residence
  • The borrower’s household income must fall within the USDA’s income limits

USDA non-streamlined refinance

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

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:

  • Borrowers must meet the USDA’s credit and debt–to–income (DTI) 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
  • The refinanced home must be the borrower’s primary residence
  • The borrower’s household income can’t exceed the USDA’s income limits

USDA-to-conventional refinance

For some homeowners, it will make more sense to refinance out of their USDA–guaranteed 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:

  • To remove USDA mortgage insurance
  • To shorten the loan term
  • To cash–out home equity

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

If your goal is to remove mortgage insurance, you’ll need at least 20 percent equity (meaning your loan–to–value ratio is 80 percent or less).

The lender will also require a new home appraisal to compare your home value to your current loan balance and determine your available home equity.

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

Remove mortgage insurance

All USDA borrowers pay an upfront guarantee fee and an annual fee on top of their regular mortgage payments.

The annual fee is a form of mortgage insurance, and it’s broken down into monthly installments added to the loan’s monthly mortgage payments. 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 percent equity. USDA mortgage insurance is charged for the life of the loan.

However, once your property has 20 percent 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 insurance charge on your monthly mortgage bill.

Shorten the loan term

USDA only offers a 30–year, fixed–rate loan for home purchases as well as refinancing.

For homeowners who’ve 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 mortgages allow 20–, 15–, and even 10–year loan terms.

However, shortening a loan’s term will usually increase its payments. 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.

Conventional, VA, and FHA loans allow cash–out refinancing, but USDA loans do not.

To tap your 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 percent equity to make the cash–out refi worthwhile.

Homeowners with credit below 620 but more than 20 percent 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.

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 options are 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’s annual fees are lower, too
  • USDA loans often have lower interest rates than conventional loans
  • You could 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
  • If you now earn more than the USDA’s income limits you won’t qualify

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.

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 six 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 percent 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 USDA guarantee fee (paid in monthly installments) that acts as mortgage insurance. This fee lasts for the life of a USDA loan. Once the home has at least 20 percent 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 home appraisal. It’s a good option for simple rate–term refinances on existing USDA loans. The Streamlined Refinance loan usually requires a credit check and income verification. To skip those steps and the home appraisal, ask your lenders about 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 percent equity. And you’ll need at least 20 percent equity to avoid mortgage insurance on your new conventional loan.

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–Assist 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 percent, the lender might deny your application.

Can you get a USDA refinance if your home is no longer in a rural area?

Yes. If your home address qualified for a USDA loan when you bought your home, you can refinance your home with a USDA loan. This is true even if your home address no longer falls within a rural area as defined by the USDA.

If you earn more than the USDA income limit, can you get a USDA refinance?

No. Only borrowers who earn less than the USDA’s income limits can qualify for a USDA loan, including a USDA refinance. USDA Guaranteed Loan borrowers must earn less than 115% of their area’s median income. USDA Direct Loan income limits are even lower. You can see whether you still qualify by entering your location and monthly income at usda.gov. If you want to refinance but don’t qualify for a USDA loan because of your income, you can still refinance into a conventional or FHA loan.

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 loan. (VA loans work only for current and former military members.) 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.

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