The USDA offers a streamline refinance program that enables you to refinance from a USDA loan into another USDA loan with very little verification. In fact, when it comes to what the USDA requires, it is simply the fact that your last 12 mortgage payments were made on time. That is all the USDA requires – they do not expect lenders to pull credit, order an appraisal, or even verify your income. Of course, most lenders will add their own requirements to the mix in order to protect themselves, but the USDA does not require any of those factors to play a role in your ability to refinance. There is one other requirement, however; you must satisfy the net tangible benefit.
What is the Net Tangible Benefit?
The net tangible benefit of a loan is some type of financial benefit that you receive as a result of refinancing. In respect to the USDA loan, this means a lower interest rate. The USDA requires that in order to take advantage of the USDA streamline refinance program, your interest rate must lower at least 1 percent. This is only for the streamline program; any other USDA refinance does not have this requirement.
Why Have the Net Tangible Benefit Requirement?
It makes sense to have the net tangible benefit requirement on the USDA streamline refinance for one reason alone – the USDA does not require any type of verification that you can afford the loan. They do not require a new appraisal, which means you could be upside down (owe more than the home is worth) and still be able to refinance. They do not require that your income gets verified again, which could mean that you are making less than before but the USDA will not know it. They do not even require that your credit gets pulled, which could mean that you were irresponsible with your finances and yet you are able to refinance again. The net tangible benefit is in place to ensure that your payment will be lower and that it will not matter if any of the above scenarios are in fact, the case for you. If your payment is lower and you can prove that you made your previous 12 payments, which were higher, on time, then you should be able to afford the lower payments.
The Loan Term
The only other requirement of the USDA streamline refinance is that the term is a 30-year term. There are no options for this, because this is how to keep your payments as low as possible. Since the USDA loan is for lower income families, it makes sense that the USDA does everything in its power to keep the payments as low as possible. This is how they keep their level of default as low as they can. Even though the USDA guarantees the loans that it approves hey do not want to have to pay out on them – they would rather have a higher amount of reserves on hand rather than have to pay lenders because they allowed smaller terms that ended up equaling unaffordable housing payments.
If you currently have a USDA loan that you obtained when interest rates were higher, you can inquire about the USDA streamline refinance program. Every lender will have different requirements, though. You might find one lender that requires your credit to be pulled and your employment to be verified. You might also find another lender that requires an appraisal because they know that the homes in your area took a large hit when the housing industry fell apart. The key is to shop around with different lenders as each lender has its own threshold of what types of risks it can accept. Eventually, you will find a lender that will take your situation as-is as long as you can meet the net tangible benefit, which means lowering the interest rate at least 1% from the interest rate you currently hold.