USDA Streamline Refinance Program Pros and Cons
Key advantages of the USDA streamline refinance program include not requiring applicants to verify their employment, income or credit score as well as no borrower debt-to-income ratio or loan-to-value (LTV) ratio limits. USDA streamline program considerations include loan restrictions, the additional expense of USDA mortgage insurance and excellent mortgage payment history.
We review the full list of the pros and cons for a USDA streamline refinance below. Borrowers should evaluate both the positives and negatives of the USDA streamline refinance program to determine if it is the right refinance option for them.
USDA Streamline Refinance Pros
Reduced Qualification Requirements -- No Employment, Income, Asset or Credit Score Verification
The USDA streamline program does not require borrowers to verify their job, income or credit score to qualify for the program. This significantly streamlines the refinance application process as borrowers are not required to submit personal financial documents such as pay stubs, tax returns, bank account statements or credit reports to qualify for a USDA streamline refinance. Additionally, the program does not apply a maximum borrower debt-to-income ratio which is relevant to borrowers whose income has decreased or whose debt payments have increased since they obtained their existing mortgage. Instead, lenders rely on borrowers' on-time mortgage payment history to determine their ability to qualify for the loan. The USDA streamline refinance program is called "streamline" because of the significant paperwork, time and cost it eliminates from the home loan refinance process.
No Property Appraisal Required
USDA streamline refinance applicants are not required to obtain a property appraisal report. Eliminating the appraisal report along with other fees saves borrowers hundreds of dollars in closing costs and streamlines the mortgage closing timetable. For a standard refinance, obtaining an appraisal report adds several weeks to the process schedule. A USDA streamline refinance usually takes less than a month to close as compared to more than a month or potentially longer for a typical home loan refinance.
Low USDA Home Loan Rate
The interest rate on a USDA home loan is typically .125% - .500% lower than the interest rate for most conventional or government-backed home loan programs. The mortgage rate for a USDA home loan is lower because the loan is insured by the USDA and borrowers are required to pay up-front and ongoing USDA mortgage insurance fees, which are also called guarantee fees. The USDA backing and insurance effectively guarantee that the lender recovers the full amount of the loan in event the borrower defaults on the mortgage. The lower interest rate on a USDA mortgage reduces your monthly mortgage payment and potentially saves you thousands of dollars in total interest expense over the life of the loan. The lower rate is especially helpful for borrowers with lower credit scores, who usually pay a higher mortgage rate. Because the USDA streamline refinance program does not require a credit report, borrowers who may have a experienced a drop in their credit score still benefit from the lower USDA interest rate.
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No Loan-to-Value (LTV) Ratio Limit
The USDA streamline refinance program does not apply a maximum loan-to-value (LTV) ratio which makes it well-suited for USDA borrowers who are underwater on their mortgage (loan balance exceeds the value of their home). Although the standard USDA home loan program applies a maximum LTV ratio of 100%, which means your loan amount cannot exceed the fair market value of your home, the USDA streamline refinance program does not use a loan-to-value (LTV) ratio limit. This makes it possible for underwater borrowers to refinance as long as they can afford their new monthly mortgage payment. By eliminating the maximum LTV requirement, the USDA streamline program enables more borrowers to refinance their mortgage regardless of their property value or if they are underwater on their mortgage.
No Borrower Income Limit
Unlike the USDA home loan program, the USDA streamline refinance program does not apply an income limit which is a key benefit for borrowers. Several other mortgage refinance assistance programs use a maximum income limit to determine applicant eligibility. This program feature is also especially helpful to applicants whose income increased since they obtained their original USDA home loan. By not using a borrower income limit, the USDA streamline program enables more borrowers to refinance their mortgage.
USDA Streamline Refinance Cons
USDA Mortgage Insurance Fees
The USDA streamline refinance program requires borrowers to pay upfront and ongoing monthly mortgage insurance fees which are also called guarantee and annual fees. As of October 1, 2016, the upfront USDA mortgage insurance fee is 1.0% of the loan amount and the monthly mortgage insurance fee is .35% of the loan amount. From a positive standpoint, mortgage insurance for a USDA loan is usually lower than the upfront and monthly mortgage insurance premium (MIP) for an FHA mortgage or monthly private mortgage insurance (PMI) fee for a conventional mortgage. Despite the lower cost as compared to FHA MIP or PMI, the upfront USDA insurance fee increases your closing costs while the ongoing monthly fee increases your total monthly housing expense. Additionally, borrowers are required to pay USDA mortgage insurance monthly fees for the life of your loan whereas PMI is removed when your loan-to-value (LTV) ratio reaches 78%.
Loan Restrictions
The USDA streamline refinance program imposes multiple restrictions on loan type and terms. First, the mortgage you refinance must be a USDA home loan which means that the property must be located in designated rural area or community. If you do not have a USDA home loan you can still refinance your existing mortgage with an USDA loan but you cannot use the USDA streamline refinance program. Second, your new interest rate must be less than or equal to the interest rate on your current mortgage. Additionally, your mortgage balance cannot increase which means you are required to pay for closing costs out of pocket or use a "no cost" mortgage, which usually means you pay a higher interest rate. Cash-out refinances are also not permitted under the USDA streamline program. Finally, only 30 year fixed rate mortgages are allowed according to program guidelines.
On-Time Payments for a Year
Program applicants must be current on their mortgage and are required to have paid their mortgage on-time for the twelve consecutive months prior to applying for the refinance. In some cases, borrowers looking to refinance may be under financial duress and struggling to make their monthly payments. These borrowers may not be eligible for the USDA streamline program due to a delinquent mortgage or late payments within the prior year.
More FREEandCLEAR Resources
USDA Streamline Refinance Guide
Review our comprehensive overview of the USDA streamline refinance program including borrower qualification requirements, key loan terms and other important program information such as property eligibility and insurance guidelines.
Mortgage Rates
USDA streamline refinances are provided by traditional lenders such as banks, mortgage banks, mortgage brokers and credit unions. Use our mortgage rate table to review updated mortgage rates and fees for lenders in your area. Even if your current lender offers USDA streamline refinances you are not obligated to work with that lender when you refinance and you should shop lenders to find the loan with the best terms. Comparing rates from multiple lenders is the best way to save money on your mortgage.
Mortgage Refinance Assistance Programs
Review our comprehensive summary of conventional and government-backed mortgage refinance assistance programs. These programs are designed to help borrowers efficiently and cost-effectively refinance into more affordable and manageable mortgages.
USDA Home Loan Calculator
Use our USDA Home Loan Qualification Calculator to determine what size USDA loan you can afford based on your monthly gross income and debt. The calculator also provides the upfront and ongoing monthly USDA mortgage insurance fees (guarantee fees) based on your mortgage amount.
Sources
"Streamlined Assist Refinance Loans." USDA Rural Development. U.S. Department of Agriculture, 2016. Web.