USDA Property Eligibility Requirements
USDA property eligibility is determined by many factors. We will cover these factors on this page. Before purchasing a property using the USDA Home Loan Program, make sure to review the following:
- Property eligibility
- Type of home
- Condition of home
- Property value
- Other structures
The State determines eligible areas and designates those areas using boundary lines. Eligible USDA properties may be located in suburbs, rural areas and are typically outside of city limits. You can use the map below to look up a property that you are interested in and see if it falls into a USDA approved area.
Type of Home
USDA mortgages can be used for a purchase or refinance for single family residences, manufactured homes, new construction, townhomes and HUD approved condos. The property must be owner occupied and be their primary residence. A primary residence is the home that you live in and receive mail at that address.
If you are looking to purchase land then unfortunately, USDA doesn’t allow for the purchase of land ONLY. Reason being, is that they want to have an asset to sell if you ever went into default on your home loan. For that reason, the USDA Guaranteed Rural Housing Loan (Section 502) is more geared toward a single-family residence, that is, land with a house on it. However, if you want to purchase land and want to immediately build a house on the property you can do it. Construction loans allow you to purchase land and build the house at the same time. Remember though, you can’t purchase land and sit on it, must be ready to build right away.
The most popular and streamlined USDA loan is for a single-family residence, also known as a single-family detached home, which is a free standing residential dwelling. According to USDA a single-family home is considered a single dwelling unit, if the home has direct access to a street, has adequate hot water, and heat that service only this unit.
Manufactured homes, also known as “modular” or “penalized” homes, must be brand new, still have tags attached, and come straight from the factory to be constructed on property and put on a permanent foundation. USDA requires that the home is a double wide and built according to HUD code. Manufactured Home Appraisal Report is required for all manufactured homes. Factory must provide a Warranty and a Comfort Heating and Cooling Certificate for manufactured units.
At this time USDA doesn’t allow financing for a mobile home. And yes, manufactured homes and mobiles homes are different. A manufactured home doesn’t come on wheels, it instead is transported in sections, assembled on site, and placed on a permanent foundation. While mobile homes, also known as trailers, have wheels attached to them for transportation and are not built to a uniform construction code and may not have a permanent foundation.
When it comes to New Construction there are a few different loan options, so you will need to consult with your loan officer about which option is right for you. Here are examples of different construction loan types:
- A Construction Loan is a loan that is closed and funded before construction begins. Borrower uses this loan to finance the builder and draws are paid to the builder during each phase of building process. Construction loans begin collecting interest when the loan closes and funds.
- An End Loan is a loan which closes and funds when the construction of home is complete, and you have received the keys.
- A One Time Close, also known as construction to perm loan, allows you to get a construction loan and the permanent loan at one time. Meaning your loan becomes a traditional USDA mortgage after construction is complete.
Townhomes are similar to single family residences and much less complicated than trying to get approved for a condo. For a townhome you just need to look up the property address and see if the property is in a USDA eligible area.
Condo building/property must be approved with HUD, The United States Department of Housing and Urban Development. Townhomes do not because you own the unit and the land it sits on.
HUD approved condos, or FHA-approved condominiums are properties that meet the government guidelines and mortgages can be insured by FHA, USDA or VA entities. If there is too much commercial space, more than 50% investor owned units, or hotel amenities on site, then the condo could not qualify. You can look up HUD/FHA approved condominiums on the government site for Approved Condos.
Condition of Home
Property must be in good condition and no huge problems with the property and past a FHA appraisal that meets HUD standards. After inspection if the appraisal report comes back with repairs needed on the property, then sellers must complete repairs prior to closing. Another option is to finance the repairs into your USDA loan. Repairs cannot exceed 10% of loan amount or $10,000, whichever is less.
Some of the conditions that are taken into account for a property is if the home has direct access to a street, up to date electrical system, adequate safe drinking water and meet requirements for sewage disposal. Home must be structurally sound and a roof with at least 3 years + of remaining life. If the property has a private well for drinking water, then a water test must be completed prior to closing to show the water is safe to drink.
When it comes to purchasing a home with a lot of acreage there are a few requirements that most lenders look at. First, there needs to be comparable comps in the area. If the property sits on 10 acres, then it needs to be common for the area, so your appraisal can have other comparable comps to compare to. Second, most lenders like to see a 70 to 30 value ratio. Meaning the home is worth 70% and the land it sits on is worth 30% of the purchase price. These numbers can be higher or lower but it needs to be common for the area.
Since it is 100% financing the appraised value will need to cover the asking price. For example, sellers ask for $200,000 for the property, then the appraised value needs to be $200,000 for USDA to insure the mortgage. One of the benefits of USDA is if you want to roll in your closing costs in the loan amount you can as long as the home appraises for more than the purchase price. The same applies to repairs, if you want to roll in repairs into the loan amount then the appraised value will needs to cover purchase price plus repairs.
USDA Guaranteed Loan program is picky when it comes to other structures on the property. Small outbuildings and storage sheds are allowed however, farm service buildings are not. If the home has a barn or small apartment, then you will want to double check with your loan officer because typically the property won’t be approved for a USDA Loan. The USDA Loan was designed for Single Family Homes and has strict guidelines that the property cannot be income producing.
USDA Farm Loans
USDA Single Family Housing Guaranteed Loan can NOT be used for the purchase of farms or income producing properties. However, USDA has a Farm Loan available to farmers and you can learn more information at USDA Farm Loan.