Owning Additional Property with a USDA Loan
If you already have the USDA mortgage, you’re taking advantage of one of the most generous home loans available, one that can be had with zero down. Perhaps you’re thinking: Wouldn’t it be nice if I could purchase a second property using USDA financing? Which begs an important question: Can you have two USDA loans?
In most cases, the answer is no. But certain exceptions apply. Let’s explore these possibilities, how a USDA loan for a second home would work, eligibility and exclusion rules, and how getting a co-signer factors into this strategy.
In general, you aren’t allowed to have two USDA loans at the same time. That’s because these mortgages are intended for primary residences only, and you can only have one primary residence. The USDA defines a primary residence as the main, permanent place where you live. It’s the property where you, the borrower, spend most of your time throughout the year; this residence serves as your official address for tax filings, identification documents like a driver’s license, and voter registration. And it’s typically located near your workplace.
“USDA loans are designed to help people buy their primary home – not second homes, vacation residences, or rental properties, which aren’t allowed,” explains Briana Sparrow, a mortgage lender with Atlantic Bay Mortgage Group.
Steven Glick, director of mortgage sales for HomeAbroad, notes that USDA loans are intentionally structured this way.
“The USDA wants to ensure these loans help low- to moderate-income folks in rural areas own a home they live in – not to build a portfolio of multiple properties they own,” he says.
However, you might be allowed to get a USDA loan for a second home, and therefore have two USDA loans at the same time, if the USDA permits it, under certain conditions:
“Life changes. I’ve had clients go through job relocations, divorces, and growing families – situations that force them to move. That’s when a conversation about a second USDA loan comes up,” says Adele Krsek, owner/mortgage broker with Ease Lending in Bend, Oregon. “The most common exception allowed is relocation for work, especially if the new home is in a different rural-eligible area.”
As was true with your first USDA loan, you’ll need to meet eligibility requirements for another USDA mortgage and USDA-eligible home. Here’s a summary of what’s required:
There’s another condition that applies to getting a second USDA loan, and it’s called the “20% rule.”
“If you already own a home with 20% equity or more – meaning you own at least 20% of that home – the USDA generally considers this sufficient to secure conventional financing. In other words, they won’t approve another USDA loan,” says Krsek. “This rule helps keep the USDA loan program focused on those who truly need the assistance.”
There’s a second 20% rule that also pertains to this topic. While the USDA’s handbook (HB-1-3555) doesn’t exactly call this a “20% rule,” it does indicate that borrowers should not have enough assets to qualify for a conventional loan. The USDA checks to see if you have personal, non-retirement liquid verifiable assets equal to at least 20% of the purchase price of the home you want to buy, can cover closing costs, meet a preferred 28/36 debt-to-income ratio, and have strong credit.
“If you do, you are considered eligible instead for conventional financing and are, therefore, ineligible for a USDA loan,” says Brian Vaughan, co-branch manager with Fairway Independent Mortgage Corporation.
The USDA expects your commute to be reasonable and practical. While it doesn’t give a fixed mileage number, it factors in distance, commute time, transportation access, and the nature of your job when approving you for a USDA loan.
But if you experience a job transfer or relocation after purchasing your first USDA home, and the new commute is exceptionally far, you may get approved for a second USDA loan for a home that is closer to work.
“Typically, a commute longer than 50 to 100 miles is a common USDA benchmark, depending on the area,” says Glick. “Your goal is to show that your new job makes commuting from your current home tough. You’ll need proof, like a job offer letter, to support your relocation exception.”
If you are approved for a second USDA loan under the special circumstances listed above, you may be able to keep the first property without automatically being required to sell it.
“You don’t have to sell or refinance the original loan, but you must prove the first home is no longer your primary residence and that you are moving into the new one,” says Glick. “Remember, too, that USDA loans are for owner-occupied homes, so you cannot rent out your first property unless you get special approval, such as for a temporary job relocation.”
Additionally, you can’t count rental income from your first USDA property to qualify for the second USDA loan.
Also, if you keep both USDA loans you’ll have to juggle two mortgages. Your respective lenders on those loans will scrutinize your finances to ensure this is sustainable and you can afford both.
If you’re having trouble qualifying for a second USDA loan due to insufficient income or credit, obtaining a loan co-signer might help. A cosigner is someone who agrees to share legal responsibility for repaying the USDA mortgage loan in addition to you, the primary borrower. By adding their credit, income, and financial stability to the loan application, it can bolster your odds of getting approved.
Keep in mind that USDA loan cosigners, as well as co-borrowers, are required to occupy the home as their primary residence as well as meet the USDA eligibility rules outlined earlier.
Need to get a second USDA home? Start gathering the necessary documentation to prove to a lender that you meet the qualifications for having two USDA loans, including a job offer, relocation notice, divorce papers, or proof of growing family size.
“The USDA and its participating lenders need solid evidence for these exceptions,” suggests Glick. “Also, be sure the second USDA property qualifies based on the USDA’s eligibility map. And don’t try renting out your first home without clearing it ahead of time with your lender, which is a quick way to run into trouble.”
