USDA home loans have many benefits, including the ability to borrow 100% of the purchase price of the property. One downside, however, is the inability to use this loan program on investment homes. The USDA began the program to help borrowers unable to secure safe and sanitary housing. The program has strict rules regarding the size of your income and the property location. Hands down, however, if you do not occupy the property, you will not qualify.
The USDA Guidelines
The USDA guidelines are straightforward:
- Your income must fall within the guidelines for your area. You can find the guidelines on the USDA website. They vary by area, so make sure you know the allowed amount for your area.
- Debt ratios should not exceed 29/41, however they do grant exceptions for certain circumstances.
- Your credit score should be at least 620. If it exceeds 620, you can have a “streamlined” process during underwriting. If it is below 620 and higher than 580, you may still qualify, however, the lender will evaluate your file more closely.
- You should not have any late payments during the last 12 months.
- All collections should be paid in full.
- You can use alternative credit sources if you do not have traditional credit. These include rent payments, insurance premium payments and utility payments.
Qualifications for Non-Investment Homes
USDA loans are not for first-time homebuyers only, but there are rules for borrowers who already own a home. In general, you need to sell your current home before you can close on a new USDA loan. This way you can certify owner occupancy, reducing the risk of USDA financing paying for investment homes. You are able to start the application process for a USDA loan while you still own a home, but you cannot close on it until you sell it.
There are exceptions to the rule, though. If you meet any of the following requirements, you may not have to sell your current home in order to secure USDA financing:
- If your current home is a mobile home, you can use USDA financing to purchase a standard home. The USDA does not consider mobile homes as suitable housing, so they would not consider purchasing a rural home an investment. In order to qualify while you still own the mobile home, you have to prove affordability of payments on both properties.
- If you must move for your job and it is greater than 50 miles away, an underwriter might grant you an exception for USDA financing. This is on a case-by-case basis in order to determine if you can afford both properties, however.
Another exception occurs when you do own safe and sanitary housing, but you have outgrown the property. For example, if your family grew and you are out of space in the home, you can shop for a larger home and use USDA financing. You have to prove to the underwriter, however, how the current home does not meet the needs of your family in order to qualify.
The Mission of USDA Loans
USDA loans began to help the rural parts of the United States. These areas typically struggle because of the lack of people who choose to move there. With the incentive to have 100% financing, many people flock to these areas now. With more people living there, the areas build up faster with commercial properties and income flowing.
The homes the USDA guarantees are homes less than 1,800 square feet in size and with a value lower than the loan limit for the area. In general, only borrowers purchasing moderate housing can take advantage of this government-backed program. This is why investment homes are not able to secure financing with the USDA program.
If you wish to use USDA financing, it must be for primary housing. Each lender can decide for themselves whether you qualify for one of the above exceptions to the rule and the USDA has the final say when they approval your loan package. If you cannot secure USDA financing, there are other government-backed products, however, none of them will enable you to purchase investment homes with a guaranteed loan product.