In early February, the USDA announced a refinance plan for section 502 loans that is effective though 2013. Called the "Rural Refinance Pilot," the plan allows borrowers with USDA rural development mortgage loans to refinance without submitting a new credit report, appraisal, any of the HUD Handbook minimum property determinations, or a property inspection.
Rural Refinance Pilot is intended to allow existing Section 502 borrowers to refinance and cut their current mortgage payments in an effort to lower the risk of foreclosure.
According to the USDA guidelines, eligible borrowers must meet three criteria:
- Meet current income eligibility requirements (see No. 10 below)
- Made timely mortgage payments for the 12-month period prior to the refinance
- Reside in one of these 19 eligible "hardest hit" states, including:
- New Jersey
- New Mexico
- North Carolina
- Rhode Island
- South Carolina
Section 502 borrowers residing in states not listed above are not eligible.
Overview of Rural Refinance Pilot Guidelines
The following is reprinted from the "Section 502 Guaranteed Loan Program Rural Refinance Pilot Guidelines" document dated February 1, 2012:
- The existing loan must be a Section 502 Direct or Guaranteed loan.
- The new interest rate must be a fixed rate 100 basis points below the current interest rate.
- The new term of the refinance loan may not exceed 30 years from the date of closing.
- A Rural Refinance Pilot loan may only include the principal balance of the loan plus a portion of or the full upfront guarantee fee. The applicable upfront refinance guarantee fee is 1.5%. No cash out is permitted to the borrower. Accrued interest, closing costs, lender fees, and late fees are not eligible to be part of the refinance loan.
- An annual fee also applies. For FY 2012 the applicable annual fee is .3%.
- A new appraisal, new credit report, HUD Handbook determination and additional property inspections are not required. The original appraisal amount may be used from Guaranteed Loan System to process the loan.
- Ratio calculations are not required. Therefore debt ratio waiver requests will not be necessary.
- Rural Refinance Pilot loans must be manually underwritten. They cannot be processed through the Guaranteed Underwriting System.
- Customary and reasonable closing costs and other fees may be collected from the borrower by the lender. Such charges may not exceed the cost paid by the lender or charged to the lender by the service provider. An origination fee of up to 1% of the total loan amount may be charged to the borrower.
- All the following documentation is required:
- Form RD 1980-21 (PDF) "Request for Single Family Housing Loan Guarantee".
- Income verifications for all adult household members.
- Uniform Residential Loan Application (PDF).
- Evidence of qualified alien status, if applicable.
- FEMA Form 81-93 (PDF) "Standard Flood Hazard Determination." Appropriate flood insurance must be obtained if the property is in a flood zone at the time of the new loan closing, even if the area was not in a flood zone at the time of the original loan closing. A flood elevation survey is not required.
- Evidence of previous 12-month mortgage payment history. The lender must secure evidence to document the borrower(s) has paid the loan on time for the previous 12 months. The lender may utilize a Verification of Mortgage obtained from or provided directly by the loan servicer that lists the payment history for each of the previous 12 months. As an alternative, the lender may submit a credit report which reflects a satisfactory mortgage payment history over the past 12 months. If the lender submits a credit report to Rural Development as proof of payment history, only the payment history of the current mortgage will be considered. Credit waivers or explanations for adverse credit that may be present on the report are not required.
- All additional requirements of RD Instruction 1980-D and applicable Administrative Notices continue to apply.
See the USDA Rural Refinance Pilot: Frequently Asked Questions (FAQ) for lenders (PDF), or contact the Single Family Housing Guaranteed Loan Division at (202) 720-1452 with questions.