USDA loans come with great benefits, but not all homes are eligible. All homes financed by a USDA loan must first meet the minimum property standards set out by the Department of Housing and Urban Development.
These ensure borrowers are getting a functional, safe and sound home to live in. Let’s look at the requirements more in-depth.
The United States Department of Agriculture (USDA) offers home loans to eligible borrowers in rural areas through its Single Family Housing Guaranteed Loan Program. These loans, also known as USDA loans or Section 502 loans, allow borrowers to purchase, build, repair, renovate or relocate a home without requiring a down payment.
While USDA loans provide many benefits, they do come with specific property requirements that must be met to qualify This comprehensive guide will walk you through the key property requirements for USDA loans to help you determine if this type of financing is right for you
Rural Area Designation
One of the first requirements is that the home must be located in an eligible rural area as designated by the USDA. The USDA defines rural areas as open country or towns/communities that meet the following criteria:
- Population under 2,500 inhabitants
- Population between 2,500 and 10,000 if rural in character
- Population between 10,000 and 20,000 if not in a Metropolitan Statistical Area (MSA) and designated as seriously lacking mortgage credit
- Some exceptions exist for areas classified as rural prior to October 1990 or between January 2000 and December 2020
The specific boundaries of eligible rural areas are determined by each USDA state office. You can verify if a property is in an eligible rural area by checking the USDA’s public eligibility website or contacting your local USDA office.
Modest Housing Size and Value
The home must be considered modest for the area and not exceed the maximum size and value limits set by the USDA:
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Size: The dwelling should not exceed 2,000 square feet of living area above grade. This excludes garages, basements etc. The size limit may be waived if the home is typical for the area or needed to accommodate a large household or disability needs.
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Value The market value of the home cannot exceed the area loan limit, which is typically 80% of the local FHA mortgage limit Some exceptions can be made with special approval for higher costs areas or specific applicant needs.
The appraised value of the site should also not exceed 30% of total as-improved property value,
Access, Water and Utilities
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The property must be located on an all-weather access road and have adequate utilities available including water, electric and wastewater disposal.
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Water and wastewater disposal systems must meet all local health and safety standards. Private wells and septic systems must be inspected while public systems require documentation of availability and capacity.
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The property must have telephone service available or be ready for telephone service installation.
Residential Use and Zoning
The property must be predominantly residential in use and character. Vacant land or properties used primarily for agriculture, farming or commercial enterprise are ineligible.
The home must comply with all applicable zoning and land use regulations. Non-conforming properties may still qualify if accepted by local zoning officials, with any adverse effects noted by the appraiser.
Environmental Requirements
The property must undergo a full environmental review by the USDA to identify potential hazards or protected sites on or near the property such as:
- Floodplains
- Wetlands
- Endangered species
- Hazardous operations like mining, oil/gas drilling etc.
- Hazardous substances like asbestos, lead-based paint etc.
Any issues uncovered must be fully mitigated as part of the transaction or approval process. An environmental inspection is required.
Securing the USDA’s Interest
To secure the loan, the USDA requires:
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A first lien on the property ahead of any other mortgages or liens
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Ownership in fee simple title (or leasehold interest on tribal lands)
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Title insurance protection
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Property insurance sufficient to cover the USDA’s interest
Appraisal Requirements
An appraisal completed by a USDA approved appraiser is required to determine the market value and condition of the property. The appraisal must:
- Be completed according to Uniform Standards of Professional Appraisal Practice (USPAP)
- Include all required interior and exterior inspections
- Document compliance with USDA property standards
- Support the purchase price and loan amount
Construction/Repairs Requirements
For new construction or homes needing significant repairs, the USDA will require:
- Plan certifications from qualified professionals
- Inspections at various stages of construction
- Documentation of required permits, warranties etc.
- Builder profit limitations for new construction
Repairs required by the appraisal or inspections must be fully completed and inspected prior to closing.
By understanding these key property requirements early in the process, you can determine if a USDA loan is feasible for your situation. Be sure to consult with a USDA approved lender to walk through the specific requirements for your property. With the right property and preparation, a USDA loan can be an excellent option for affordable home financing.
USDA Loan Minimum Property Requirements
USDA loans can only be used when the home is the borrower’s primary residence. 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. There should be no hazards blocking access to the home.
- They must have functional heating, cooling, and electric systems: All systems must be installed, operational and support all home functions including major appliances. No exposed wiring allowed.
- They need to be structurally sound: The home’s foundation must be free of major cracks or moisture issues. There must also be enough life expectancy in the foundation to last the life of your loan— if not longer.
- They must have adequate roofing: The home’s roof must have at least two years of life left. There can be no apparent holes, leaks or missing shingles allowing moisture into the dwelling.
- They must have access to adequate water supply and plumbing: Plumbing, water, and waste removal systems must be functional.
- They need functional doors and windows: All exterior and interior doors must be installed and be working. All windows must be in good condition and free of cracks, leaks or visible mold.
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?
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. Foreclosed homes and short sales are also eligible.
Pros and Cons of a USDA Loan | All You Need to Know About USDA Home Loans EXPLAINED
FAQ
How strict is the USDA appraisal?
Can USDA loan be used on Fixer Upper?
What disqualifies a home from the USDA financing quiz?
What are the requirements for a USDA property?
Meet safety standards: The property must adhere to the USDA’s minimum property requirements for safety, structural integrity, and access to utilities and services. Income limits: Household income can’t exceed 115% of the area median income to meet USDA income eligibility requirements.
Who is eligible for a USDA loan?
Eligible rural area: The USDA defines an eligible area as having a population of 20,000 or fewer. Check the USDA’s eligibility site or the map below. Single-family primary residence: USDA loans are only available for primary residences, not investment properties or second homes.
How does the USDA finance a home loan?
The USDA provides funding for direct loans, which have favorable terms like low interest rates (as low as 1% with payment assistance) and long repayment periods (up to 38 years for eligible applicants). Income, creditworthiness, and the property’s location in an eligible rural area all affect eligibility.
How do I apply for a USDA loan?
Provide proof of citizenship: With Guaranteed and Direct Loans, you must be a U.S. citizen, eligible noncitizen or qualified alien. Meet property requirements: No matter the type of USDA loan, the property must be a single-family dwelling and be used as your primary residence.