The USDA home loan program allows borrowers to refinance their existing USDA loan. Typically this is done when current mortgage rates are lower than the rate on the existing note. Borrowers can lower their monthly payments refinancing to a lower rate yet with the USDA program there are really three versions of the USDA refinance loan. A standard refinance is fully documented including a new appraisal, credit and income documentation and a new set of disclosures and documentation. Those with a USDA loan can pull cash out, given sufficient equity, as long as the refinance application is fully documented as with any standard USDA loan.
For borrowers with a USDA loan wanting to pull cash out during the transaction will have equity available in which to use. In this case, it may be better to explore other options given sufficient equity. For example, if the borrower has a 30 percent equity position, where the existing loan balance represents 70 percent of the current market value, a conventional loan might be a better option due to the lack of mortgage insurance or guarantee fee needed.
The USDA program also has two other types of refinance loans, a streamline and the streamline pilot program. Let’s look at both.
The USDA Streamline
The USDA streamline is available to any borrower currently holding a USDA mortgage. This streamline allows borrowers to refinance to a new, lower rate. The USDA streamline doesn’t require an appraisal which means valuation isn’t an issue. This means the amount owed on the mortgage may in fact be higher than the current market value. However, USDA allows for a refinance without a program as long as the borrower is lowering the interest rate, hence the monthly payment.
The USDA streamline program does not however allow the borrower roll closing costs, other than the guarantee fee, into the loan amount. This is similar to other government-backed refinance programs where the borrowers are required to pay for certain costs, obtain a lender credit or adjust the interest rate to pay for some or all of the required lender and third party fees.
The USDA introduced a pilot program, first introduced in 2012, takes many of the standard USDA streamline features and reduces yet again the amount of documentation required.
The USDA Streamline Pilot
The USDA streamline pilot is currently available only in 34 states yet there are moves to expand the program to all 50. The USDA streamline pilot doesn’t require an appraisal but also takes on characteristics found in FHA and VA streamline versions. Besides not requiring an appraisal, the USDA streamline pilot also does not require:
- A credit report
- Income documentation
- Employment documentation
Valuation isn’t an issue and the amount owed may be greater than the current market value. And while the USDA doesn’t set minimum credit score requirements, USDA lenders do and the most common credit score lenders ask is 640 yet there are those who will require a score as low as 600. However, with the USDA streamline pilot program, since no credit report is required, there is no credit score needed. As it relates to credit, the lender simply verifies there are no mortgage payments more than 30 days past the due date in the previous 12 months.
What states is the pilot program available? Currently, the pilot program is in Alaska, Arizona, Arkansas, California, Colorado, Florida, Georgia, Idaho, Illinois, Indiana, Kansas, Kentucky, Michigan, Mississippi, Missouri, Montana, Nevada, New Jersey, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Washington, West Virginia and Wisconsin.
The USDA streamline program is available everywhere but for now the pilot program is only available for 34 states with the possibility of including all states coming very soon. If you have a USDA loan and are thinking of refinancing, you have two choices—a good one and a really good one. If you’re not sure if you or your loan is eligible for a USDA streamline refinance, simply pick up the phone and contact an experienced USDA lender.