Can You Use A USDA Loan For An Investment Property? The Surprising Answer Explained

Because they are intended for primary residence, buyers cannot use a USDA loan for investment property.

The USDA loan program is designed to provide an affordable, minimal-barrier route to homeownership for low- and middle-income earners. In order to qualify, the property must be located in a USDA-eligible area and serve as the buyer’s primary residence. The borrower must also meet certain income and credit requirements, though these tend to be less stringent than other loan programs currently available.

USDA loans are designed to help Americans purchase their primary residence affordably and easily, so rental homes, vacation homes, farm buildings and other income-producing properties aren’t eligible.

Investment properties can be an excellent way to generate passive income and build long-term wealth. However, securing financing for an investment property can be more challenging than getting a mortgage for your primary residence. This leads many real estate investors to ask – can you use a USDA loan for an investment property?

The short answer is no USDA loans cannot be used to purchase investment properties or vacation homes. But why is that the case when USDA loans offer such attractive benefits like no down payment and low interest rates? Let’s take a closer look at the details.

What is a USDA Loan?

USDA loans are a special type of government-backed mortgage insured by the United States Department of Agriculture, The program’s purpose is to help low-to-moderate income buyers in rural areas achieve homeownership

Some of the key features of USDA loans include:

No Down Payment Required: 100% financing means borrowers can get into a home without coming up with a down payment. Closing costs can also be financed into the loan.
Low Interest Rates: USDA loans often have lower rates than conventional mortgages, saving borrowers money.
Relaxed Credit Guidelines: Minimum credit scores around 640 are accepted. Past bankruptcies, foreclosures and other issues can be overcome.
No Income Limits in Most Areas: Only designated “high cost” counties have income caps to qualify.

With benefits like these, it’s easy to see why USDA loans are so popular. But the program does come with strict occupancy requirements.

USDA Loans Are For Owner-Occupied Homes Only

The biggest caveat of USDA loans is that they can only be used to purchase a primary residence that you will live in. Second homes, vacation properties and investment properties are strictly prohibited.

This occupancy requirement comes directly from the USDA Rural Development guidelines for the program. The home you finance with a USDA loan must be your principal residence where you spend the majority of your time.

There are two main reasons why investment properties do not qualify:

1. Prevent Abusive Practices

The USDA wants to prevent predatory lending practices and make sure borrowers are using the program as intended. Without occupancy rules, investors could try to take advantage of the program’s lenient credit guidelines and no down payment perk.

2. Limit Taxpayer Liability

Since USDA loans are government-backed, defaults and foreclosures represent a liability to taxpayers. Requiring borrowers to live in the home helps reduce the risk of strategic defaults from investors walking away from rental properties.

While inconvenient for real estate investors, these restrictions protect the integrity of the program. But it doesn’t completely shut the door on using a USDA loan creatively.

Unique Situations Where a USDA Loan Might Work

Even though USDA loans are not directly eligible for investment properties, there are some unique situations where they could potentially make sense:

House Hacking: House hackers buy a multifamily property to live in one unit while renting out the others. Since it’s your primary residence, this fulfills USDA’s owner occupancy rule.
Transferring Ownership Later: You may be able to initially buy a property as your primary home with a USDA loan, then transfer ownership to an LLC later without triggering the due-on-sale clause. Consult your lender.
Non-Occupant Co-Borrowers: In some cases, close family members may be able to be added as non-occupant co-borrowers to meet income requirements.

Proceed with caution if attempting any of these scenarios as rules are strict. Also keep in mind there are other special use cases where USDA loans work well.

Common USDA-Eligible Property Types

While investment properties don’t make the cut, USDA loans remain flexible for several other unique property situations:

Manufactured Homes: USDA loans can finance manufactured and modular homes on permanent foundations meeting HUD codes.
Mixed-Use Properties: Properties that combine residential and commercial uses in the same structure, such as a home above a shop.
Acreage and Farms: Loans up to $500,000 can be used to purchase larger rural properties or hobby farms.
Co-ops: Cooperative ownership arrangements are USDA eligible as long as they are approved by the lender.

The bottom line is USDA loans remain a versatile financing tool for primary residences located in rural areas. They open up homeownership opportunities to qualified borrowers in many life situations.

Alternatives For Investment Property Financing

If your heart is set on acquiring investment real estate, don’t let the USDA restriction deter you. There are plenty of other mortgage options out there for investors. Here are a few solid choices:

Conventional Investment Property Loans

Traditional investment property loans are offered by banks and mortgage lenders. 20-25% down payments are typically required and rates are higher than owner-occupied homes.

SBA Loans

The Small Business Administration’s real estate loan programs can be used to purchase mixed-use and multi-unit properties. Down payments as low as 10% and low rates.

FHA 203(k) Rehab Loan

Fixer-uppers can be financed with a 203(k) loan that rolls purchase price and renovation costs into one mortgage. Live for one year then convert to rental.

DSCR Loans

Debt-service-coverage-ratio loans look at rental income rather than your credit. Perfect for investors who may not qualify for other loans.

Hard Money Loans

Asset-based hard money loans from private lenders can fund an investment property purchase/rehab fast in just weeks.

Private Lenders

Individual investors, real estate groups and private lending companies all offer financing for investment properties.

Partnership Equity

Passive investors may provide equity financing in exchange for partial ownership and income profits from the property.

Cash-Out Refinance

Tap into your current home’s equity to give you funds to purchase rental properties.

As you can see, with a little creativity there are plenty of options to get investment property financing even if USDA loans aren’t in the cards. The most important thing is identifying the right loan program for your particular situation.

Key Takeaways

USDA loans are 100% financing mortgages that can only be used to purchase a primary residence, not an investment property.
Occupancy requirements prevent investors from misusing the government-backed loans.
Alternative programs like conventional investment loans, SBA loans, FHA 203(k), DSCR mortgages can provide financing for real estate investors.
In unique cases, house hacking or transferring later to an LLC may allow a USDA loan to work.

While USDA loans give homebuyers a leg up, they aren’t the right fit for real estate investing. Make sure to seek specialized investment property financing to fund your rentals. With the right approach, almost anyone can become a successful real estate investor.

Can you use a USDA for land?

That depends. Though purchasing land with the primary purpose of income would violate USDA regulations, buyers may still purchase land with income-producing features located on it. This would include things like barns, silos, livestock facilities and greenhouse, as long as they are not part of a commercial or income-producing operation. A barn used for storage or a greenhouse used to grow personal produce would be allowable under USDA rules.

2,119 people found a USDA lender in the last 24 hours!

The USDA’s debt-to-income restrictions play a big role in why income-producing properties and large plots of lands aren’t eligible for these loans. Because USDA loans are designed for low- and middle-income earners, there are very specific rules for how much borrowers can spend on housing debt — and debt in general.

Because larger plots of land and income-producing properties can be more expensive, both up front and in monthly costs, they are more likely to push borrowers over these DTI guidelines and disqualify them from eligibility.

Lenders can also have concerns about a primary residence becoming intertwined with a business.

Other USDA Loan Programs

Though a traditional USDA loan isn’t an option for income-producing properties like farms or multi-family units, the U.S. Department of Agriculture does have several loan options designed just for these ventures.

USDA Loan vs. DSCR Loan: Best Investment Property Financing Options in 2023

FAQ

Can USDA be used for investment?

USDA property requirements may not allow for investment properties or second homes, but there is flexibility in the type of residence you can buy. These mortgages can be used to finance new construction, manufactured homes, modular homes, condos, townhomes, and other alternative properties.

Can an investor assume a USDA loan?

VA, FHA and USDA mortgages all carry a qualifying assumable clause, which means any owner-occupant buyer can qualify using the same standard the loan was issued under with the existing mortgage servicer. Investors cannot assume these loans.

Can USDA loan be used on Fixer Upper?

You bet. A USDA renovation loan allows you to finance 100% of the purchase and 100% of your renovation costs, plus repairs up to the “as-improved” market value. That means you can buy and renovate a fixer-upper with no down payment.

Can my boyfriend live with me if I have an USDA loan?

Only the USDA borrower and their immediate family members can reside on the property. If the borrower or a family member needs regular or full-time care, the caretaker cannot live in the residence.

Are income-producing properties eligible for a USDA loan?

Income-producing properties are ineligible for the USDA home loan. If your property contains a barn, livestock facility, silo, or greenhouse that is no longer in commercial use, there’s a chance it may qualify. Discuss the situation with a USDA lender first to be sure. What types of properties are eligible for USDA loans?

Can a USDA loan be used for investment properties?

“People tend to believe this, because USDA loans cannot be used for investment properties,” says Jill Gonzalez, an analyst for WalletHub. To qualify for a USDA loan, a home cannot be a vacation home or designed for income-producing activities. Qualifying individuals must use a USDA loan for their main residence and live in it.

Can a USDA loan be used for a home?

“Many home shoppers and real estate professionals assume that USDA loans are only for farms and rural properties, but in fact they can be used for most property types, including condominiums, townhomes, and modular or manufactured homes ,” says Tunador.

Can you buy a vacation house with a USDA loan?

You can’t use the USDA loan program to buy a vacation house, second home, or rental/investment property. Beyond being your primary residence, the house also needs to meet these USDA loan property requirements: They must be accessible: You must be able to access the property from a road, street, driveway, or another route.