The USDA loan includes a lot of really great features than can help you get into a home with almost nothing out of pocket. So why doesn’t everyone do a USDA loan?
Just as the VA loan is only for veterans, the USDA loan has a strict qualifier as well: rural single family homes only, for low- to moderate-income homebuyers. But what exactly is “rural” and what qualifies as “low to moderate income”? You might actually be surprised, and chances are good that you could qualify for a USDA loan if you live outside a major city by any small distance—you don’t need to live 500 miles into the desert or deep in the Midwest farmland.
Still, there are a few drawbacks. Let’s look at a few of the specific negative characteristics of the USDA loan so you’ll have a better understanding of whether you can use it.
4 Risks & Drawbacks to USDA Home Loans
1. Location Specific
Perhaps the biggest drawback of the USDA loan is that many homes, because of their location, simply will not qualify, though a surprising number still will. Be sure to check the USDA website to determine if your location would qualify for a USDA loan.
Related: USDA Rural Development Loan: The 100% Financing Loan That’s Not “Just for Farmers”
2. More Red Tape and Waiting
Just like the other loan programs we’ve discussed thus far, you may have to deal with significant waiting, red tape, and other obnoxious paper problems when obtaining a USDA loan. I sold a home recently to a woman who used a USDA loan, and the loan took nearly four months to close because of a “backlog” at the USDA. Be prepared for possibilities like this.
3. Single Family Only
As the name of the loan would suggest, the USDA loan is eligible for use only on single-family homes, which means small multifamily properties such as duplexes, triplexes, and fourplexes are out of consideration. With that said, the USDA does offer a 10% down payment loan on multifamily properties in rural areas (for non-owner occupants). If you want more information on the Guaranteed Rural Rental Housing Program, visit USDA.gov.
4. High Leverage
Obtaining a 0% down payment loan requires leveraging yourself to an exceptionally high degree, which could be a negative for some. We’ve talked about this numerous times already, but leverage is not necessarily a bad thing if the deal is good enough. However, a 100% loan on a mediocre deal may result in a bad deal. Use caution any time you use a highly leveraged loan.
[This article is an excerpt from Brandon Turner’s The Book on Investing in Real Estate with No (or Low) Money Down.]
Would you invest—or have you invested—using USDA loans?
Let us know your experiences with a comment!