USDA financing is for borrowers who live in rural areas and who do not have the means to secure any other type of financing. The premise behind the program is to build up the rural areas of America. These areas tend to get overlooked. The people who do live there then suffer due to lack of economic stimulation.
The USDA program aims to put an end to this issue. Because of its unique nature, the USDA loan has many specific guidelines, including the fact that you must purchase a primary home with your loan. This means you cannot have somewhere else to live. The program helps you afford suitable housing. Generally, this means you cannot even own a rented home. As is the case with most other things, though, there are exceptions to the rule.
This is what the USDA looks at – do you have decent and sanitary housing already? If you do, you may not be eligible for USDA financing. If you don’t, you may qualify. Just what is decent and sanitary housing? For starters, if you own a mobile home, it does not count as decent housing. The USDA will allow you to finance a home with their program while still owning a mobile home. What if you own a standard home and rented it out, though? Are you eligible for additional financing? The answer is typically “no.” You cannot have any other housing and qualify for a USDA loan. This violates the mission of the USDA, to provide low-income borrowers with a safe place to live. You already have a place to live if you rent out a home. The exceptions to the rule prevail, though:
- Your job just relocated you more than 50 miles away from your current home. If you don’t want to sell your home, you may not have to. You can rent it out to someone else and use USDA financing to purchase a new home that you will live in that is closer to your job. This is up to underwriter discretion, though. You cannot assume if your job relocates you that you can just secure additional USDA financing.
- If your family grew recently and you no longer fit in the original house you purchased, you may be able to move and keep this house. Again, this is up to underwriter discretion. For example, you cannot say you outgrew your home, but then purchase another home the same size. You must purchase a larger house to accommodate your family or the work around doesn’t work.
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What if the USDA Doesn’t Agree?
If the USDA doesn’t agree that your circumstances meet either of the above requirements, you cannot secure additional USDA financing. This means you have to sell your current home first. Then you may be eligible for USDA financing. There are no cut and dry answers regarding what the USDA will allow and not allow when it comes to rented homes. Generally, they don’t allow borrowers to have 2 properties, unless they meet one of the above exceptions. The underwriter also has another say in the process, which may make or break your deal.
Using Income from the Rented Home
If you do have a home you rent out, you will likely need the income to qualify for the USDA loan on your primary residence. USDA loans work a little differently when it comes to income. They want the total of all income from every household member. This helps to determine your eligibility. If your household’s income is too high, you cannot secure a USDA loan. However, you may need the income from the rented home in order to qualify for the loan. This is different than being eligible for the program. The USDA bases eligibility on the number of people in your household and the total income from everyone. The more people who live with you, the more income you can have. In addition, the various scenarios of the people living with you can grant you some allowances. For example:
- Children under the age of 18 and those older than 18 but in school full-time reduce your income by $480 for every child
- Disabled family members reduce your income by $480 each
- Elderly family members reduce your income by $400 each
A unique circumstance of the USDA loan, however, is that you can make too much and become ineligible. The USDA program is for low-income families. If you make too much, you should be able to secure financing from another government-backed program. The USDA program is for those who do not have the liberty of using other programs.
Once the USDA determines you are eligible for the program, they go back to using the income from the borrower and co-borrower to qualify you for the loan. If you need to include a mortgage for your first home in your debts, you may need the rental income to help keep your debt ratio low enough to qualify. The good news is USDA debt ratio maximums are higher than most other programs – they like lenders to keep the debt ratios around 29/41, but there is some flexibility.
The USDA Has the Final Say
Unfortunately, there is no cut and dry answer regarding whether you can or cannot purchase a second home with USDA financing. You have to get all of your ducks in a row, so to speak, and see what they say. Make sure you have plenty of evidence of the reasons you need to move, such as outgrowing your home or changing/relocating your job. With proper evidence, the USDA will have an easier time approving you for the USDA loan with a rented home. Keep in mind, though, that you should pay close attention to the fine details on your current loan. Did you agree to live in the home for a certain amount of time? You want to make sure you are not violating any other mortgage guidelines before you secure a new USDA loan.
Securing USDA financing is usually fairly simple, but if you have extreme circumstances, you might have a harder time. This is not to say the USDA will not grant exceptions. They are rather flexible. As long as you have adequate proof of your reason and it does not violate the USDA’s guidelines, you may be able to secure financing for a “second home” while still owning a rented home.