USDA Cash Out Rules & Guidelines

The United States Department of Agriculture, also known as the Agriculture Department, is commonly abbreviated by the well-known acronym USDA.

But Fannie Mae or Freddie Mac it’s not. At least where name recognition is concerned.

While this federal executive department is responsible for developing and executing laws related to everything from farming to food, it’s less commonly known as an organization that also backs mortgage loans.

It’s why some aspiring homeowners are surprised to learn that USDA loans are available for buyers with low and very-low-income and offer 100% financing and reduced mortgage premiums. What’s more, USDA loans also feature below-market mortgage rates and the option to refinance when the time is right.

Unfortunately, all USDA refinances are considered to be “rate-and-term” loans only and won’t advance any money in the deal, thus no cash can be “taken out.” However, there are a few situations where buyers may find themselves with cash in hand at the close of the transaction.  

About USDA Loans

The Agriculture Department backs home loans through its USDA Rural Development Guaranteed Housing Loan program.

Also known as the Section 502 Direct Loan Program, it assists low-income mortgage applicants in obtaining housing in eligible rural areas. However, certain factors are considered when determining eligibility, including an applicant’s income at or below the low-income limit for the area where they wish to buy the home.

Additionally, applicants must meet other criteria including:

  • Having a willingness and ability to repay the loan
  • Being unable to obtain a loan by other means
  • Occupying the home and using it as a primary residence
  • Meeting all basic citizenship requirements
  • Being without secure, decent, and sanitary housing at the time of application

What Are Some Other USDA Loan Basics?

What makes USDA loans different than other government-backed loans is that final determination of eligibility will be completely different. An initial tool used by the USDA looks at the overall composition of the household, monthly income and debts (more commonly known as the debt-to-income ratio), the property location, estimated property taxes, estimated hazard insurance, and more.

Fixed interest rates, when modified by the payment assistance provided with the loan, can be low as 1%, with a loan payback period of 33 to 38 years for very low-income applicants. Additionally, no down payment is required.

Can You Really Refinance a USDA Loan?

There are a few things you should know if you’re currently paying a USDA loan and looking to start the refinance process.

Not all mortgage lenders work with the USDA or have USDA loan approval. Furthermore, not all loan officers have the training necessary to originate such loans.

To make it easy, the USDA maintains a list of approved lenders on its website you can turn to. But to answer the question on whether you can really refinance a USDA loan, then the answer is yes … if you’re willing to follow the guidelines.

USDA Refinance Guidelines

They say imitation is the sincerest form of flattery, and in the case of USDA refinancing, they’re right.

The USDA’s refinance program was meant to mirror other streamlined programs from the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), and the HARP program from Fannie Mae and Freddie Mac, according to The Mortgage Reports.

There are currently three refinance options available:

  1. Non-streamlined refinance, which requires an appraisal. The maximum loan amount may not exceed the home’s new appraised value, plus the one-time upfront fee, known as the USDA guarantee fee (which is 1% of the loan amount). Applicants must also meet other terms and conditions.
  2. Streamlined refinance, in which a new appraisal is generally not required for existing borrowers. The maximum loan amount is structured so that it will not exceed the original loan amount at the time the home was purchased, with the exception of the upfront guarantee fee. Other conditions also apply, such as adding new borrowers to the refinanced loan (but existing borrowers on the old mortgage note may not be removed, and one must remain on the newly refinanced loan).
  3. Streamlined-assist refinance, which is said to be the USDA’s most popular refinancing program. Current eligibility requirements are more straightforward, outlining that the home must be the primary residence, have an original mortgage backed by the USDA, and a borrower who has already made 12 consecutive on-time payments at the time of application. Finally, the refinance must result in the mortgage payment decreasing by at least $50 per month.

How to Get Cash Out Of a USDA Refinance

As noted above, borrowers with a USDA-backed mortgage looking to refinance are not eligible to receive “cash-out” in the transaction. However, there is a bit of a loophole where that’s concerned.

According to the USDA, those opting for either a non-streamlined or streamlined assist loan may receive reimbursement at settlement. This would be the case if personal funds were advanced for eligible loan purposes, such as an appraisal or credit report fee. At closing, a portion of that “cash out” may be returned to applicants after final escrow and interest calculations are made.

Additionally, the USDA may allow cash out to fix up a home. Normally, the mortgage would cover the initial purchase of the home. Then, a refinance can be used (as long as there is equity in the property) to repair or remodel the property.

The above scenario might fall under the USDA’s construction financing, but there is a long list of restrictions that must be followed with this construction-to-permanent loan. The first part of the loan occurs during construction or renovation. The lender holds onto the funds in escrow, and the builders are paid as the work progresses.

Sometimes, there might be money left over from construction, but it won’t go back to the borrower. Instead, the lender must apply the cash to the principal of the loan. The only funds the borrower might receive back are reimbursements for any expenses that were paid out of pocket.

Every Refinance Situation Is Different

Remember, it typically takes between 30 and 45 days to refinance a home. That timeframe also applies to USDA-backed loans.

That’s according to Origination Insight Reports from Ellie Mae, which helps lenders originate mortgages.

While 30 to 45 days might sound like a long time, you can remind yourself that it’s a standard waiting period.

Being educated on the process, understanding eligibility requirements and double-checking your paperwork are just a few of the steps you can take to make sure everything goes as smoothly as possible.

You can also avoid closing delays by avoiding other things that could red flag the loan, such as changing jobs, opening new lines of credit, or making major purchases.

Above all, If you’re looking in an eligible area and you’re interested in a USDA loan, choose among USDA-approved lenders who can guide you smoothly through the process.


Author: Bryan Dornan

Bryan Dornan is a financial journalist and currently serves as Chief Editor of Cash Out Refi Bryan has worked in the mortgage industry for over 20 years and has a wealth of experience in providing mortgage clients with the highest level of service in the industry. He also writes for RealtyTimes, Patch, Buzzfeed, Medium and other national publications. Find him on Twitter, Muckrack, Linkedin and ActiveRain.

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