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Options to Refinance an Underwater USDA Mortgage

What are my options to refinance an underwater USDA mortgage?

Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience
, Trusted Mortgage Expert with 45+ Years of Experience

Your best option to refinance an underwater USDA mortgage is the USDA Streamline Refinance Program. Among the many benefits the program offers borrowers, a USDA Streamline Refinance does not apply a maximum loan-to-value (LTV) ratio, which means your mortgage amount can be greater than the value of your home.

For example, if your home is currently valued at $200,000 and your outstanding USDA mortgage balance is $225,000, you may be eligible to refinance your loan through the program. With most standard programs, you cannot qualify for the refinance unless your loan amount is less than your property value. So if your property value declined since you originally obtained your loan, you may be stuck in your current mortgage.

Review our USDA Streamline Refinance Program Guide

For borrowers with an existing USDA home loan, the USDA Streamline Refinance Program provides a solution to this challenge and may be your best and potentially only option to refinance your mortgage. We outline the many advantages of the program below:

No maximum LTV ratio. As outlined above, the USDA Streamline Refinance Program does not apply a maximum LTV ratio, which makes it ideal for home owners who are underwater on their mortgage. This also means you may not be required to obtain an appraisal report, depending on lender guidelines, which saves you time and money.

No minimum credit score. Unlike the standard USDA Home Loan Program, which typically requires a minimum credit score of 640, the Streamline Refinance Program does not use a minimum score. So you may be eligible to refinance even if your credit score has dropped since you obtained your mortgage. Please note that although not required by program guidelines, many lenders apply their own more challenging qualification requirements including a minimum credit score.

No maximum debt-to-income ratio. The USDA Streamline Refinance Program does not apply a maximum debt-to-income ratio so if your debt expenses increased since you obtained your loan, you still may be able to qualify for the refinance. Although the program does not use a maximum debt-to-income ratio, lenders are required to verify that you can afford your new monthly mortgage payment and repay the loan over time.

Lower mortgage rate. Because the USDA home loan program is backed by the federal government and borrowers pay mortgage insurance, USDA Streamline Refinance mortgage rates are usually lower than conventional refinance rates. A lower mortgage rate reduces your monthly payment and makes owning a home more affordable.

The USDA Streamline Refinance Program is provided by approved lenders. We recommend that you contact multiple lenders in the table below to learn more about program availability and eligibility requirements:

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Current Refinance Mortgage Rates as of November 13, 2019
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Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. Click for more information on rates and product details.

No borrower income limits. The standard USDA Home Loan Program limits applicants’ household income but the Streamline Refinance Program does not. In short, if you make too much money, you cannot qualify for a standard USDA mortgage but that limit does not apply with the streamline program. So if your monthly income increased significantly since you obtained your mortgage, you may be eligible for a USDA Streamline Refinance.

Easier application process. Because you may not be required to provide a property appraisal report, credit report and other documents, the application process for a USDA Streamline Refinance usually take less time and costs less than a standard refinance. Because the application process usually requires less documentation, you should be able to get approved and close your refinance faster.

Although the qualification guidelines for a USDA Streamline Refinance are more flexible than for other programs, you are still required to meet certain eligibility requirements. First, as outlined above, you must demonstrate that you can afford your new monthly mortgage payment and pay back your loan. Lenders review your monthly gross income and debt expenses to make sure you can afford the mortgage.

Second, you must be current on your USDA home loan and have no late payments over the past twelve months. So if you are behind on your mortgage or if you have a late payment within the past year, you may need to wait to be eligible for the program.

It is also important to highlight that the program only applies to existing USDA mortgages. If you have another type of loan, you are not eligible for the program.

The USDA Streamline Refinance Program does not allow cash out refinances so you cannot receive any loan proceeds when you refinance. Additionally, only 30 year fixed rate mortgages are eligible for the program and adjustable rate mortgages (ARM) and interest only loans are not permitted.

As with your original USDA mortgage, you are also required to pay upfront and monthly USDA mortgage insurance, which is an extra closing cost and ongoing expense, in addition to your loan payment. USDA mortgage insurance, also known as guarantee fees, are partially offset by the lower mortgage rate you pay.

Finally, the property you are refinancing must be in a USDA designated rural area. Unless your home has moved since you obtained your original mortgage, this requirement should not be an issue.

If you cannot qualify for a USDA Streamline Refinance, there are other options for distressed borrowers. The USDA offers foreclosure prevention programs for homeowners who are struggling to pay their mortgage including payment subsidies and loan deferment. You can visit the website below to learn more about these programs.

USDA Foreclosure Prevention Website

Additionally, we provide an overview of other refinance assistance programs including mortgage modification programs for borrowers who are struggling to stay in their home. These programs may enable you to lower your mortgage balance and monthly payment so that your loan is more affordable.

Sources

USDA Streamline Refinance Program Guidelines: https://www.rd.usda.gov/files/RD-RHS-SFHStreamlinedAssistRefinanceLoans.pdf

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About the author

Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR.  Harry is a licensed mortgage professional (NMLS #236752). More about Harry

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