The U.S. Department of Agriculture guarantees home loans for rural properties to encourage development in the country's rural areas. The loan guarantee helps buyers get into a property with no down payment so they can eventually build equity. A borrower can also refinance a loan with the department. Three main types of refinance are offered: streamline, non-streamline and (for certain states) a pilot program. Several factors determine whether you can use the USDA's rural housing loan to refinance.
A streamline loan doesn't require an appraisal or credit check. The lender uses an automated valuation system to determine a value and considers the borrower's USDA loan payment history to determine eligibility. Only loans currently backed by the USDA qualify for the streamline program. The non-streamline refinance requires a credit check, income qualification and an appraisal, and may be used for refinancing non-USDA loans. The pilot refinance, which started in 2012, was created for borrowers in states hardest hit by the housing downturn. As of 2013, borrowers in 34 states with USDA- and non-USDA-backed loans can use the program. The pilot refinance is a two-year program.
The USDA updates its list of eligible rural areas annually. The department defines a rural area as a town with a population of no more than 25,000 which is located neither adjacent to a "large city" or in "a continuous urban area." The list of eligible areas shrinks as rural areas develop. As a result, homes with existing USDA loans that are located in ineligible rural areas may still qualify for a USDA refinance.
Your household income must remain within the USDA's maximum income limits. Eligible borrowers have low to moderate incomes. The limit increases with household size and varies by area. In general, a USDA borrower can make no more than 115 percent of the median income for his area.
A loan-to-value (LTV) ratio compares the loan balance to a home's value. The higher your LTV, the less equity you have. You can have minimal equity, no equity or negative equity to refinance with the USDA. You may refinance closing costs and the USDA's 2-percent guarantee fee up to a 102 percent LTV. In states hit hardest by declining home values, including Arizona, California and Florida, the USDA offers a pilot refinance program as of 2013. No max LTV applies to a pilot refinance; however, the transaction must result in an interest-rate reduction of at least 1 percent and you can't have any late payments in the past year.
You must occupy the home as your primary residence to refinance with any of the USDA's programs. New borrowers may be added on a streamline or non-streamline refinance and a previous borrower may be deleted; however, at least one borrower on the original loan must remain after the refinance. On a pilot refinance, new borrowers may be added and all previous borrowers must remain.
Income and Credit
The USDA requires a credit report for the streamline and non-streamline refinances, which include creditor information for all of your accounts. For the pilot refinance, it requires only a mortgage credit report that reflects on-time USDA loan payment for the past year. Most USDA lenders require at least a 620 score. Your new housing payment after the refinance may not exceed 29 percent of your gross monthly income, and your total monthly debts may not exceed 41 percent. The pilot refinance has no debt-to-income limits.
The non-streamline refinance requires an appraisal. The appraisal inspection must meet the Department of Housing and Urban Development's minimum property standards. HUD-approved appraisers can conduct USDA appraisals. Your home must meet standards for structural and financial soundness, and it must have no health or safety defects that affect occupants or the home's future marketability.
- USDA: Single Family Housing Guaranteed Loan Program: Refinance Fact Sheet
- USDA: Eligible Rural Areas: California
- USDA: Guaranteed Housing Loans: Eligibility
- USDA: News Release: Agriculture Secretary Vilsack Announces Expansion of Refinancing Program to Help More Rural Homeowners
- HUD: Appraiser Roster
- HUD User: A Study of the HUD Minimum Property Standards for One- and Two-Family Dwellings and Technical Suitability of Products Programs, March 2003
K.C. Hernandez has covered real estate topics since 2009. She is a licensed real estate salesperson in San Diego since 2004. Her articles have appeared in community newspapers but her work is mostly online. Hernandez has a Bachelor of Arts in English from UCLA and works as the real estate expert for Demand Media Studios.