Low- and moderate-income households in the rural parts of America often find it difficult to finance a home. The United States Department of Agriculture (USDA) provides a loan program that helps people in this situation. The USDA’s Rural Development loan program lends directly to homeowners, but also guarantees loans made by other banks to homeowners in rural areas. Many homeowners often use this program to purchase a house and then later refinance the mortgage using the same Rural Development program or another lender’s loan program.
The USDA’s Rural Development loan program does not require any prepayment penalties. The homeowner may refinance or pay off a Rural Development loan at any time and only owe the principal balance and any unpaid interest. Even if the loan was guaranteed by the Rural Development loan program but funded by another lender, the lender may not charge a prepayment penalty.
If a homeowner chooses to refinance into another Rural Development loan program he must meet all of the program's qualifications, including the income eligibility. The USDA designed the Rural Development loans specifically to help lower- and moderate-income households. These loans are not designed to help people who make an above-average income. For example, a four-person household with two children living in Kit Carson County, Colorado, can only make $45,100 a year to qualify for a direct loan from the USDA Rural Development Program. The same household can make up to $74,050 to qualify for a loan made by a bank, but guaranteed by the Rural Development program. If the homeowners qualified when they purchased the home but received an increase of income since then, they may not qualify for a refinance under this program. However, they likely qualify for a refinance under another lender’s program, such as an FHA-insured mortgage. These income limits vary depending upon the county where the family lives.
Rate and Term Refinancing
Homeowners who currently have Rural Development loans may refinance their loans using a rate and term refinance program. The rate and term refinance program only changes the loans terms, the interest rate or a combination of the two. Rural Development loans are always 30-year loans; the program does not offer 10-, 15- or 20-year loans. If a homeowner wishes to refinance into a shorter-term loan, he must refinance into a different loan program. If he refinance into another Rural Development mortgage, then he must have a 30-year mortgage and cannot receive any funds at closing.
Rural Development loans do not offer cash-out refinance options. To obtain a cash-out refinance, a homeowner must contact another lender and refinance under a different program. The Federal Housing Administration (FHA), Freddie Mac and Fannie Mae all provide cash-out refinance loans. These loans allow homeowners to borrow from the equity in their homes and use the cash for virtually any reason they choose.