Verifying your income and the value of your home is no longer required for a USDA mortgage refinance. You can lower your interest rate and/or payment in a short period. Any USDA approved lender can refinance your loan, assuming you currently have a USDA loan. It sounds too good to be true, doesn’t it?
An Answer to a Problem
The USDA started the streamline mortgage refinance problem to help the struggling real estate industry. Housing values plummeted and homeowners quickly became underwater. This meant no refinancing. It also meant higher payments than some people could not afford. It wasn’t just the housing industry that suffered – the economy suffered too. This meant many people were without a job. The USDA mortgage refinance program helped these people refinance by not requiring any additional documentation.
Making Timely Payments
The key to approval for the USDA mortgage refinance is timely mortgage payments. What does this mean? Look back over the last 12 months. Did you make your mortgage payment during the month it was due? This is what the USDA looks for. Could you make it a few days late and still qualify? You could. What you cannot do is make your payments more than 30 days late. Making the payment within the same month of its due date is acceptable.
Affording the Payment
Just why does the USDA care about your timely payments so much? Think about this – refinancing means you lower your payment. The USDA streamline program requires a certain level of savings, we talk about that later. If you can afford the higher payment over the last twelve months, they figure you can afford the lower payment. It is as simple as that.
There are several ways lenders can verify that you have a timely payment history. The most common is with your credit report. However, this goes against the natural way of doing things with the USDA streamline program. Technically, you don’t have to verify your credit score. Some lenders may require it, but not all. There is no minimum credit score necessary. If you find a lender that requires your credit report, yet you know there are issues on it, shop around for a different lender. There are lenders out there that don’t require your credit report.
Other ways lenders can verify your mortgage payment history include:
- Directly from your current lender – Most servicers provide a 12-month payment history rather quickly for lenders
- Canceled checks – If you write checks for your mortgage, you may be able to provide the canceled checks for the last year to show timely payments of your mortgage
How Timely Payments Prove Your Worth
Just how do you prove your worth with timely mortgage payments? This goes back to the USDA’s requirement regarding how much you save. They have a threshold of $50. Your payment must decrease at least this much in order to qualify. Let’s look at this rationally:
Let’s say your current payment equals $950 and you can refinance to receive a payment of just $900. If you provide timely payments of the $950 over the last year, it makes sense that you can afford the $900 payment even easier. While the USDA requires only a $50 savings, it might not be worth it for you. $50 a month only nets you a savings of $600 per year. Once you cover the closing costs, the savings quickly deplete. Let’s explain how.
Find Your Break Even Point
A general rule for refinancing is to find your break even point. This is the point where the savings outweigh the cost of the refinance. Just how do you know when this is? The calculation is as follows:
Figure out how much you save each month
Get a total of the closing costs you will pay
Total closing costs/Monthly Savings = The number of months it takes to pay off your closing costs
This is called your recapture period. Let’s look at a real example:
Closing costs $3,000
$3,000/$50 = 60 months
This means it would take five years to see the savings. This brings up an interesting point.
Will you stay in the home for five years? Even if you do, how much beyond that five years will you stay in the home? If, for example, you will only stay for another 2 years beyond the five, you will only save $1,200. That is a lot of hassle, not to mention a lot of money to pay upfront just to save $1,200 seven years down the road.
This is how you determine if the USDA mortgage refinance is right for you. It might seem exciting to think you can save money every month, but sometimes the savings just aren’t worth it.
Finding the Best Deal
How do you make sure you get the best deal possible? Shop around. There are many approved USDA lenders around. You don’t have to use your current lender. You also don’t have to use the first USDA lender you find. Get quotes from several lenders to find the one that is right for you. Every lender has different requirements, not to mention different fees. Why pay more for the loan than you need to? When you have at least 3 quotes, you can determine which lender offers the best deal, meaning the lowest closing costs as well as the most savings on your payment.
The good news is, the USDA mortgage refinance often comes with lower than normal closing costs. This may make it easier to lower your recapture period. If this is the case, the refinance is a simple process that you can get through quickly. Without the need for an appraisal or a large amount of documentation, you can quickly secure approval.
The most important thing is that you make your mortgage payments on time. If you already show yourself as high risk by not making timely mortgage payments, no lender will refinance your loan. They only want to accept low risk borrowers. While compensating factors, such as a high credit score or stable income may help you with other loans, the USDA streamline loan does not require these factors. Focus on making your payment on time and when rates drop, you should be in good position to take a lower rate and save money every month.