Can You Get a HELOC With a USDA Loan?

USDA loans help make homeownership affordable for buyers in rural areas. These government-backed mortgages have attractive benefits like low and zero down payment options. However, USDA loans also come with more restrictions than conventional loans One key restriction is that you cannot take out a home equity line of credit, also known as a HELOC, if you have a USDA mortgage

What is a USDA Loan?

USDA stands for the United States Department of Agriculture. They offer direct home loans and loan guarantees to assist buyers in rural communities with home financing.

To qualify for a USDA loan, the property must be located in an eligible rural area. The home must also fall under USDA value limits and meet minimum property standards.

As a buyer, you’ll need to meet USDA income limits and credit requirements. A key benefit is that USDA loans allow for low or zero down payments.

Why Can’t You Get a HELOC With a USDA Loan?

When you take out a USDA loan, you agree to certain terms and restrictions put in place by the government. One of these is that you cannot take out additional loans that use your home as collateral while you have the USDA mortgage.

This means options like home equity loans and HELOCs are prohibited The USDA does this to reduce risk and prevent homeowners from defaulting on their original mortgage loan.

Additional reasons why HELOCs are restricted include:

• Debt limits: The USDA must confirm you can afford the mortgage. More debt could impact this.

• Collateral requirements: HELOCs require your home as collateral, which conflicts with USDA terms.

• Property restrictions: Your home must meet USDA standards, which could be compromised if you use funds improperly.

Overall, the limitations are to protect taxpayers since USDA loans involve government funds. As the lender, they want to reduce risk.

Alternatives to Tap Home Equity

Not being able to get a HELOC is frustrating if you need to access your home equity. Here are a few options USDA borrowers can consider instead:

Refinance Your USDA Loan

One alternative is refinancing your current USDA mortgage. There are a couple different ways you can potentially get cash out through a refi:

• USDA Streamline Refinance: This lets you refinance into a new USDA loan to get a lower rate or otherwise improve terms, without tapping equity.

• Cash-out refinance: You can refinance into a conventional loan or other non-USDA mortgage that allows equity withdrawal. This requires full underwriting but gives you lump sum cash.

• Lower-cost repairs: For minor home improvements, ask the USDA if they will finance the repairs directly through your existing loan at a low interest rate.

Switch to a Non-USDA Loan

In some situations, you may be able to qualify for another type of mortgage loan:

• Conventional loan: If your finances now allow, you may be able to qualify for a traditional loan that gives you more flexibility.

• FHA, VA, or other government loan: Depending on your situation, another government-backed mortgage may be an option that allows equity borrowing.

This will require fully refinancing your current USDA loan and meeting all underwriting requirements for the new loan. It also means losing any USDA benefits you currently have.

Borrower-Paid Mortgage Insurance

Some USDA direct loans let you cancel the annual mortgage insurance premium if you pay an upfront fee. This could give you a bit of cash from equity while keeping your current loan.

Personal Loans

If you need a smaller amount of money for a short timeframe, consider an unsecured personal loan. This doesn’t use your home as collateral but can provide funds for expenses like debt consolidation or an emergency.

Can I Get a HELOC After My USDA Loan?

Once you fully pay off your USDA mortgage, you can take out a HELOC or other home equity loan options. At that point, your home is no longer being used as collateral for the USDA mortgage.

Some other things to keep in mind:

• Monitor your loan balance so you know when you’ll have the option for a HELOC after paying your USDA loan

• Continue making all mortgage payments on time to keep building home equity

• Maintain your property’s value by making any needed repairs

• Improve your credit score and financial profile as much as possible while paying your loan

This will put you in the best position to qualify for a HELOC or other borrowing options once your USDA mortgage is paid off.

Alternatives to HELOCs for USDA Borrowers

HELOCs provide flexibility since you only access funds as needed. But there are other options USDA borrowers can use to get cash in a pinch:

• Home equity loan: These give you an upfront lump sum based on your equity. The interest rate is usually higher than a HELOC.

• Cash-out refinancing: As mentioned above, switching to a conventional or non-USDA loan can let you tap equity. Make sure to compare current rates and costs first.

• 401(k) or retirement plan loans: You may be able to borrow against your own retirement savings temporarily. This avoids using your home as collateral.

• Credit cards: For small or short-term borrowing needs, a credit card can provide funds, although interest rates are high.

• Family loans: If you have the option, borrowing from family can be more flexible and affordable than consumer financing. Just be sure to document the loan terms.

• Personal loans: These unsecured loans from online lenders provide set lump sum cash. Rates are often lower than credit cards.

Key Takeaways

While USDA loans provide affordable home financing, they limit your ability to tap home equity. Key points to remember include:

• HELOCs are prohibited while you have a USDA mortgage

• Refinancing or switching your loan type are potential options to access equity

• Pay off your USDA loan first before taking out a HELOC

• Explore alternatives like personal loans or retirement account borrowing based on your needs

• Maintain your finances and property to put yourself in the best position for equity borrowing later

USDA loans have tradeoffs, but they open the door to homeownership for many buyers. Know the restrictions upfront and look at all your alternatives to create financial flexibility.