Are you dreaming of buying a home in the countryside with a USDA loan? This government-backed loan is a great option for many, but not all homes qualify. Understanding what disqualifies a home from USDA financing can save you time, money, and frustration. Let’s break it down.
What is USDA Financing?
A USDA loan, supported by the U.S. Department of Agriculture, helps eligible buyers purchase homes in rural and suburban areas. It's attractive because it offers low interest rates and requires no down payment. However, strict guidelines exist to ensure properties meet USDA standards.
Structural Issues Can Lead to Disqualification
Photo by Jakub Zerdzicki
A major reason homes fail USDA inspections is structural problems. Here are specific issues that could disqualify a property:
- Foundation Problems: Cracks or instability in the foundation can be a red flag.
- Roof Damage: Worn-out or leaky roofs are unacceptable.
- Safety Hazards: Mold, lead-based paint, or environmental contaminants like asbestos make a home ineligible.
- Other Structural Issues: Major frame damage or walls that fail to meet local codes are deal-breakers.
The home must provide a safe and sound living environment. If major repairs are needed to meet standards, those must be completed before closing.
Non-Functional Systems Are a Problem
USDA loans require homes to have all essential systems functioning. Key areas reviewed include:
- Heating and Cooling Systems: The home must have reliable heating for winter and cooling for summer where required.
- Plumbing: No leaky or faulty plumbing. Water must be clean and safe for use.
- Electrical: Outdated or hazardous electrical systems can lead to disqualification.
- Sewage and Water Access: A septic system and water supply must be installed, accessible, and functional.
USDA financing is only available for homes that offer basic livability and functioning systems.
Income-Producing Properties Are Ineligible
The USDA loan is for residential housing, not income generation. This rule prohibits financing for:
- Farms or properties with income-generating barns, silos, or greenhouses.
- Rental properties or vacation homes.
- Land used for business purposes, such as animal farming or storage facilities.
Even if the home meets structural standards, these characteristics make it ineligible for a USDA loan.
Location Must Be in an Eligible Rural Area
USDA loans are intended to promote homeownership in rural America. A property's location plays a big role:
- Rural Areas Only: The property must be located in a USDA-defined rural area, which can include certain suburban zones.
- Appraisal Challenges: If the property value is excessively high compared to similar homes in the area, it could affect eligibility.
To check whether a property qualifies, use the USDA's online eligibility tool.
The Home Must Be Purchased as a Primary Residence
This loan is designed for owner-occupied homes. A home must be your primary living space to qualify. Properties purchased for the following purposes are disqualified:
- Second homes or vacation properties.
- Rentals or investment properties.
Borrowers must move into and reside in the home shortly after purchase. Using a USDA loan for anything else violates the program’s rules.
Poor Property Conditions May Cause Disqualification
USDA loans require homes to be in livable condition at the time of purchase. Here’s what the appraisal will evaluate:
- Code Compliance: The property must meet local building codes.
- Fair Condition: Deteriorating homes requiring extensive repairs don’t qualify.
- Low Maintenance Needs: Homes in poor condition may disqualify for financing if the USDA considers them too risky.
Unlike conventional loans, USDA loans are designed to ensure safety and habitability standards are met upfront.
Other Key Disqualifying Factors
- Acreage Size: USDA loans have no acreage limits, but excessive land may lead appraisers to disqualify a property.
- Incompatible Property Types: Mobile homes can qualify only if they meet detailed HUD guidelines or have permanent foundations.
- Zoning Conflicts: If the property zoning allows commercial use, it may be ineligible unless it’s strictly residential.
Always discuss these guidelines with a qualified lender to ensure you understand the specifics.
Final Thoughts
Before falling in love with a rural home, make sure it qualifies for USDA financing. Structural problems, non-functional systems, income-generating property features, and location issues are common disqualifiers. Work with a USDA-approved lender and stay informed about the loan requirements. With careful planning, your dream home could be closer than you think!