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.
Because they are intended for primary residence, buyers cannot use a USDA loan for investment property.
Primary Residence Requirements
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.
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.
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.
Using the USDA Loan for Farming
When it comes to USDA loans and farms, buyers have lots of options. The USDA actually has nine unique loans designed just for farm purchases.
These options include:
- Farm operating loans
- Farm ownership loans
- Guaranteed farm loans
- Youth loans
- Loans for minority and women farmers and ranchers
- Beginning farmers and ranchers loans
- Emergency farm loans
- Native American tribal loans
These loans are managed by the Farm Service Agency. To be eligible, buyers need to show good credit history, be current on their debts and have proven training, experience or education in managing a farm/ranch.
USDA Loans for Multi-family Units
The USDA also offers loans on multi-family properties through its Multi-Family Housing Direct Loan program. The program is designed to help qualified borrowers increase affordable rental supply in low- and middle-income earning areas.
The loans are reserved for state and local government agencies, non-profits, federally-recognized tribes and for-profit organizations, including LLCs. Eligibility requirements include:
- Rent on individual units on the property must be capped at 30 percent of 115 percent of the area’s median income.
- Average rent for the entire project can’t exceed 30 percent of the area’s median income.
- The property must have at least five units.
As with other USDA loans, the property must be located in a qualified rural area.