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Refinancing a USDA loan
Learn whether to use the streamlined assist refinancing program — or a conventional loan.
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If it’s time to refinance for lower rates or a shorter term, you have choices with your USDA loan. The streamlined assist refinance program is for those looking to stay in the USDA program. But if you have equity in your home and it makes sense for your situation, you can refinance to a conventional loan.
Benefits of refinancing a USDA loan
If you think you can get a better rate on another USDA loan, consider the streamline assistance refinancing program. You don’t need an appraisal on your home or a credit check. However, you can’t use it for a cash-out refinance.
Refinancing your USDA loan to a conventional loan can lead to lower monthly payments, a fixed rate or cashed-out equity to put toward improving your property or other expenses. And if you refinance to a shorter loan term, you may pay your mortgage off faster.
What to watch out for
Ask about fees when exploring refinancing options, and keep in mind potential drawbacks for each refinancing type.
USDA streamlined assist refinance
- Mortgage insurance. For refinances, the USDA requires a 1% upfront guarantee fee due at closing and a 0.35% annual fee. You’ll pay mortgage insurance for the life of the loan, but you can roll it into your mortgage payment.
- No cash-out option. If you’re looking to refinance for renovations or pay down debt, this program doesn’t allow cash outs.
Conventional refinance
- Private mortgage insurance. If you don’t have at least 20% equity in your home, you must pay PMI. Calculate this expense against potential savings before you refinance.
Both USDA and conventional refinance programs charge closing costs, which can range from 2% to 5% of the loan amount, depending on the lender. If you refinance your home for $150,000, you could end up paying $7,500 upfront.
When can I refinance my USDA loan?
When you can refinance your USDA loan differs between the streamlined assist refinancing and conventional refinancing.
USDA streamlined assist refinance
To be eligible for a streamlined refinance:
- Your existing loan must be current for at least 12 months prior to refinancing
- A refinance must lower your current principal, interest, real estate taxes and homeowners insurance (PITI) payments by at least $50.
Conventional refinance
You can refinance your USDA loan to a conventional loan at any time, though most lenders require:
- At least 3% equity in your home — or at least 20% equity to avoid PMI
You’ll also need to meet the following borrower requirements:
| USDA streamlined assist refinance | Conventional refinance | Conventional cash-out refinance | |
|---|---|---|---|
| Minimum credit score | 660 | 620, though 740 or higher is best | 620, though lenders prefer 640 |
| Maximum LTV | 100% | 97% | 80% |
| Maximum DTI | 41% | 36% but up to 45% with credit score and reserve requirements | 45%, higher with six months reserves |
| Income requirements | Varies by region | Not applicable | Not applicable |
How to refinance a USDA loan
Shop around for the lowest rates and fees from multiple lenders before taking on the five steps to refinancing:
- Apply for the loan. Conventional loans require you to prove your income and assets. After you submit your application, the lender performs a credit check.
- Get preapproved. Your lender will provide a rate estimate and a list of fees.
- Get your home appraised. For a conventional loan, your lender sends an appraiser to your home to determine how much it’s worth. On the other hand, there’s usually no appraisal required for the USDA streamlined assist refinance program. A new appraisal is required for borrowers who previously received subsidy during their loan term.
- Receive approval. If you’re refinancing to another USDA loan, your loan requires approval by the state’s USDA office. The lender then sends your loan to an escrow company, where it compiles your paperwork.
- Sign on the dotted line. At closing, you’ll meet with an escrow agent to sign through your paperwork. Carefully review the rates, fees, terms and conditions of your new loan — including your monthly mortgage and first payment’s due date.
Bottom Line
Learn whether refinancing to a new USDA loan can get you strong rates, or if changing to a conventional loan better meets your bottom line. To land the best loan you’re eligible for, compare lenders and home loans before you apply.
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