USDA Refinancing: Information and Options

In this article:

• About USDA Refinancing
• Streamlined Refinancing
• Non-Streamlined Refinancing
• Rural Refinance Pilot Program
• Do You Qualify for USDA Refinancing?

If you bought your home using a Section 502 Direct or Guaranteed Loan — both of which help people of modest incomes buy homes in rural areas — you may be able to refinance through the United States Department of Agriculture (USDA). The USDA initiative lets borrowers refinance at a lower interest rate so that they can lower their monthly mortgage payments to more manageable levels.

Those looking to refinance through the USDA — sometimes even if they are underwater on their homes — may have the following options. In each option, the borrowers must have a Section 502 Direct or Guaranteed Loan and provide income documentation for all borrowers in the household and proof of flood insurance.

The residence must be their primary residence, and properties that were eligible for the loan at their origination that have now become ineligible can still qualify for the refinancing program. All loans will be refinanced at a fixed rate for 30 years and are subject to a 2 percent upfront fee and a 0.4 percent annual fee.

Streamlined Refinancing

This refinancing option, which is available only for Guaranteed Loans, does not require an appraisal. The new loan amount can’t be more than the principal on the existing loan plus a guarantee fee of 0.5 percent of the loan amount. In addition, the accrued interest, closing costs and lender fees can’t be folded into the new loan.

The lender will run your credit report (borrowers with bad credit must have a credit waiver) and will require a debt-to-income ratio of 29/41. This means that the lender prefers that your housing costs don’t exceed 29 percent of your monthly gross income and that your total housing costs plus other debt payments don’t exceed 41 percent.

See today’s refinance rates on Zillow

Non-Streamlined Refinancing

The non-streamlined program, which requires an appraisal, is available for Section 502 Direct or Guaranteed Loans. The interest, closing costs, guarantee fee of 0.5 percent of the loan amount, and lender fees can be folded into the loan -- as long as the borrower has built up sufficient equity in the house (this is determined by the appraisal). The maximum loan amount can’t exceed the fair market value of the home, which will be determined by the appraisal.

The lender will run your credit report (borrowers with bad credit must have a credit waiver) and will require a debt-to-income ratio of 29/41.

Rural Refinance Pilot Program

This program is only available in select states and for those with either a Section 502 Direct or Guaranteed Loans. If you are refinancing a guaranteed loan, you will not need an appraisal, but you will need one if you are refinancing a Section 502 Direct Loan that has received a subsidy.

Like with the non-streamlined financing option, the interest, closing costs, guarantee fee of 0.5 percent of the loan amount, and lender fees can be folded into the loan. Plus, lenders can make the borrower pay an origination fee or a commission -- of no more than 1 percent of the loan amount.

The lender only has to verify that your last 12 months of mortgage payments were made. If a credit report is run, the lender can only use the mortgage payments with which to evaluate the borrower. The pilot program does not have debt-to-income requirements. The new interest rate will be fixed at a minimum of 1 percent below the current rate and the loan will be for 30 years.

Do You Qualify for USDA Refinancing?

To find out which plan is best for you, you can contact a lender on Zillow. Note that cash-out refinancing is not allowed in any of the above options.