The Downsides of USDA Loans: 9 Cons You Should Know Before Applying

USDA loans offer many benefits like no down payment and flexible credit requirements. But these government-backed mortgages also come with some potential drawbacks. As you consider applying for a USDA loan it’s important to understand the key cons so you can decide if it’s the right financing option for you.

In this comprehensive guide, we’ll outline the top 9 disadvantages of USDA loans that you need to know before moving forward with an application. Understanding both the pros and cons will set you up to make an informed home buying decision.

What is a USDA Loan?

USDA loans are mortgages insured by the U.S. Department of Agriculture that help low-to-moderate income borrowers in rural areas achieve homeownership. These government-backed loans offer perks like:

• No down payment required
• More flexible credit requirements
• Lower interest rates
• No monthly mortgage insurance

However USDA loans also come with eligibility requirements and restrictions you need to be aware of. Let’s look at some of the key downsides.

9 Cons of USDA Loans to Consider

While USDA loans provide a viable path to homeownership, they aren’t right for everyone. Here are 9 potential drawbacks to take into account:

1. Strict Income Limits

To qualify for a USDA loan, your income must be below the limit for your family size and area. Limits range from $60,900 for a 1-2 person household to $98,950 for 7+ people. Higher earners over these thresholds won’t be eligible.

2. Property Location Restrictions

USDA loans can only be used to purchase homes in eligible rural areas as defined by the USDA property eligibility map. Homes in cities or urban locations won’t qualify.

3. Limited Home Types

You can only use a USDA loan to finance a single-family home, condo, townhome, or manufactured home. Multi-unit properties and non-residential properties aren’t eligible.

4. Must Be Owner-Occupied

USDA loans require you to use the home as your primary residence. Vacation homes or investment properties don’t qualify. You must move in within 60 days of closing.

5. Longer Loan Processing Time

Due to extra verification steps, it takes longer to process a USDA loan compared to conventional financing. If you need to close quickly, it may not be the best option.

6. Upfront Guarantee Fee

USDA loans charge an upfront guarantee fee of 1% of the loan amount. On a $200k loan that’s $2,000. This fee can be financed into the mortgage.

7. Annual Fee

On top of the guarantee fee, USDA loans also charge an annual fee of 0.35% of the loan balance. This ongoing cost is folded into your monthly mortgage payments.

8. Manual Underwriting Required

USDA loans involve a more extensive manual underwriting process. Automated underwriting systems can’t be used. Manual underwriting takes more time and documentation.

9. Potentially Lower Loan Limits

While USDA does not publish maximum loan limits, lenders frequently impose lower caps compared to FHA and conventional loans. Loan amounts may be restricted depending on your finances.

Key Takeaways on USDA Loan Cons

USDA loans provide a viable avenue to homeownership for buyers who qualify, but there are some definite drawbacks to factor into your decision making:

• Strict income and property eligibility requirements
• Limited home and property types that qualify
• Required owner-occupancy of the property
• Extra fees and processing times
• More extensive manual underwriting

Carefully weighing the pros and cons will determine if the advantages of USDA loans outweigh the disadvantages for your home buying situation.

USDA Loan Alternatives to Consider

If the downsides have you reconsidering a USDA loan, here are some alternative financing options to research:

FHA Loans – Allow low down payments and lower credit scores. More flexible on property types and loan limits.

VA Loans – Offer 100% financing for veterans and service members. No down payment or monthly mortgage insurance required.

Conventional 97 Loans – Require just 3% down payment. Eligibility based on credit score and debt-to-income ratio.

Down Payment Assistance Programs – State and local programs provide grants or loans to assist with down payments and closing costs.

Low Down Payment Conventional Loans – Conventional loans with 5% down provide an alternative if you have moderate savings.

Adjustable-Rate Mortgages (ARMs) – Feature lower initial interest rates and payments that may increase over time.

Consult a Mortgage Professional

As you weigh the pros and cons of USDA loans, discussing your options with an expert mortgage professional is key. They can assess your financial situation and home buying goals to match you with the most suitable loan product. A loan officer can explain the eligibility requirements, property restrictions, and costs associated with USDA loans and guide you through the application process.

Armed with a full understanding of the advantages and disadvantages, you can make a confident decision about whether to apply for a USDA loan or consider alternative financing for your home purchase. Partnering with a lender provides the insight you need to select the right loan program to make your dream of homeownership a reality.