Does the Home You Want To Buy Qualify for a USDA Loan? Here’s How To Tell

While most homebuyers know that they'll need to meet certain requirements to get a home loan, in some cases the house must pass certain standards, too. This is definitely the case if you're considering a USDA loan from the Department of Agriculture.

USDA loans can be a boon to homebuyers due to their fairly lenient qualifications for homebuyers' incomes and credit scores. However, these loans do have strict standards that the house must meet.

"It is limited, the types of properties you can finance," admits Jake Vehige, president of mortgage lending at Neighbors Bank.

One main requirement for USDA loans is the home's location: Eligible properties must be in rural or suburban areas with a population of 35,000 or less. (Listings on Realtor.com® will typically indicate if the home qualifies for a USDA loan.)

Beyond location, the home must also meet other criteria. While the exact terms will vary by area, here are some general guidelines to help you tell whether a home is eligible for a USDA loan.

What type of home qualifies for a USDA loan?

While there is a lot of flexibility in the type of home that may be accepted for a USDA home loan—including condos, townhouses, and new construction—not all homes will qualify. Since USDA loans are meant to help lower-income homebuyers, it's not intended to be used to buy a vast mansion or even an investment property.

On the contrary, eligible homes must appear "modest" relative to their location. In many cases, that boils down to square footage.

While the exact limits will vary by state and area, the general rule of thumb is that the land itself cannot be worth more than 30% of the value of the actual home sitting on said property.

While USDA homes shouldn't be too extravagant, they can't be shacks on the verge of collapse, either, They will need to meet certain basic livability requirements.

"If you’re looking to completely refurbish or renovate a home, you need to consider whether the property is in such a state of disrepair that it raises safe, sound, and sanitary concerns," explains Vehige. "Issues like foundation problems or a failing roof can make a loan like a USDA mortgage a tough product to use."
Here are some other issues to consider:

• Easy access to the property: The home should be easily approached from a paved or all-weather road or other similar entryway with no hazards or obstructions.
• A sound structure: The foundation must be free of major cracks or moisture issues, and there must be enough life expectancy in both the foundation and the framework of the home to last the duration of the loan or longer.
•  An adequate roof: The roof must prevent any moisture from coming in. So there can be no apparent leaks, holes, or missing shingles. The roof must also seem able to last for at least a few more years. (In other words, it doesn't need to be immediately replaced.)
• Working doors and windows: All exterior and interior doors must be operable, meaning they open and close without issue and should be free of cracks, leaks, and visible mold.
• Water and functional plumbing systems: The home must have adequate water flow to support working plumbing, water, and waste removal systems within the property.
• Operable heating and cooling: The home must have working heating and cooling systems. Though the design, system, and fuel source don't matter, the unit must provide appropriate temperature control.
• Safe and working electrical: The electrical components should not show signs of disrepair (e.g., no frayed or exposed wires). They must also be up to date and able to handle the demands placed on them with normal usage (including appliances) for the size of the home where they're installed.

Additional requirements for direct loans from the USDA

Very low-income homebuyers might qualify for a direct loan from the USDA, but applicants should know that these homes must meet extra requirements.

The main criterion is that the home's market value may not exceed the USDA's applicable area loan limit. While this will vary by area, it currently ranges from $419,300 on the low end (like in Albany, NY) to
$967,800 on the high end (like in Santa Cruz, CA).

Keep in mind, though, that this applies only to direct loans that very low-income individuals can apply for through the USDA. Many homebuyers may instead qualify for a USDA guaranteed loan through a lender. These loans have no home value limits, although they do have income limits. An individual's income cannot exceed 115% of the area median, and the applicant’s total debt load, with the house, may not exceed their income by more than 41%.

The USDA home loan appraisal process

To prove that a home meets the USDA's criteria, all homes financed by USDA loans must undergo an appraisal. While any home will generally have an appraisal before a lender agrees to a mortgage, with a USDA loan, it's slightly different because the appraiser needs to evaluate the property not only to determine its market value, but also to see if it meets USDA property condition guidelines.

But as Vehige points out, it isn't something to be overly worried about.

“It’s not much different from a standard appraisal process," he explains.

"Government-backed loans do have a few additional concerns compared to conventional loans, but the differences aren’t substantial. An appraiser is assigned, they inspect the property, and issue an appraisal that determines the home’s value using the sales comparison approach. If there are any major issues, additional due diligence may be required.”

However, because all of these requirements must be met for a USDA loan to be approved, it's important that the lender and appraiser you are working with are familiar with the USDA loan process and standards.

Can I tell if a home will be USDA-eligible just by looking at it?

In some cases, experts advise it might be wise for a potential homebuyer to pay to have a home inspection done before the official appraisal. While this is an additional expense, it can be worth it to be aware of any potential issues ahead of time that might keep the buyer's USDA loan from going through.

"If there are issues with foundation, the roof, or that type of thing, a USDA loan is probably going to be a pretty tough product to use," Vehige acknowledges.

In that same vein, sellers who are keen to find a buyer might wish to consider having a pre-listing home inspection done with an eye toward showing if their rural home could qualify for USDA financing. If it does, this information is then something a real estate agent can share with prospective homebuyers.

Additional edits and information provided by Dina Sartore-Bodo.