The government offers a variety of loans for borrowers who have limited income. Among those choices is the USDA loan. This program allows low income borrowers to secure 100% financing for a home located in a rural area. As an added benefit to the program, the USDA allows borrowers to use the USDA streamline loan to refinance. This allows borrowers to refinance with very little verification involved. Because the government agencies that oversee these loans, which in this case is the USDA, guarantee the loans rather than fund them, they must charge mortgage insurance premium. This helps to keep the agency in the business of guaranteeing loans for low income borrowers.
How Does the USDA Streamline Loan Work?
The USDA streamline loan allows current USDA borrowers to refinance their loan without the need to verify income, assets, credit, or the value of their home. There are just a few requirements you must meet. These include:
- A lower payment – The idea behind the loan program is to help you afford your loan a little easier. The USDA requires the interest rate to be at least 1 percent lower than your current rate and for you to save at least $50 a month in order to use the program. This helps you to only refinance when there is a true benefit to your financial situation.
- Suitable housing payment history – Your recent housing history lets the USDA know if you are serious about your mortgage payments. In the last 12 months, you cannot have more than one 30-day late payment. If you do, you must wait until a full 12 months passes again, where you do not have more than one late payment. This is in order to protect the USDA from default. If you have more than one late payment, you might be in the process of heading towards default and a new refinance would only put the USDA in a worse situation.
- Owner occupied property – You must live in the property as well. The USDA program is strictly for low-income families to have a suitable place to live. You can provide your driver’s license, utility bills, tax returns, or property tax records with your address to verify your owner occupancy.
How Much Mortgage Insurance Premium Will You Pay?
The mortgage insurance premium you will pay on a USDA Streamline Loan is the same as you paid with your original USDA loan. You will pay an upfront fee as well as a monthly mortgage insurance fee. The upfront fee equals 1% of your loan amount. If your loan equals $150,000, you will owe $1,500 for the funding fee. This fee is due at the closing; however, you can roll it into your loan amount without affecting the LTV.
The monthly mortgage insurance you will pay for the life of the loan equals 0.35% of the outstanding principal balance. The USDA bills this amount one time per year and sends it to your lender. The lender collects the amount from you monthly, though. This means they take the annual bill and divide it among the 12 months in the year. This helps to make the annual mortgage insurance premium more affordable for you. In the above example, your original annual MIP would equal $43.75 per month.
Why Does the USDA Charge MIP?
Just like the FHA program, the USDA program is self-funded. They rely on the premiums collected from current borrowers to offer the program to future borrowers. In order to continue to build up rural areas and provide very low-income families with a suitable place the live, the premiums will continue to be charged. The good news is that the premiums change from time to time. The amount the USDA charges is based on the amount of reserves they have. As soon as they reach a specific threshold where they can comfortably provide the program, they are able to lower the premiums for future borrowers. Oftentimes, this encourages current USDA borrowers to use the USDA Streamline program to lower their payment.
Can You Cancel USDA MIP?
The major difference between USDA MIP and conventional loan mortgage insurance is the ability to cancel the premiums. With USDA loans, you pay the premiums as long as you hold the loan. This means long after you have less than 80% borrowed compared to the value of your loan. The conventional loan, on the other hand, allows you to cancel your MIP as soon as you hit an 80% LTV. In fact, the law requires the lender to cancel the premium automatically once you hit 78% LTV. USDA premiums continue to be paid in order to keep the USDA funded.
The USDA Streamline Loan gives current USDA borrowers a great chance at refinancing. Despite the fact that you have to pay the funding fee again as well as continue to pay annual mortgage insurance premium, it is a great program. As long as you save money every month by lowering your interest rate at least one percent, you can start reaping the savings rather quickly after paying off the low funding fee. This allows you to start paying more principal to your loan, giving you quicker access to a home that you owe free and clear of any mortgage financing. If you want to refinance your USDA loan, make sure to shop around to find the best rates and closing costs available to you.