USDA possible Drawbacks (Cons)

USDA Possible Drawbacks (Cons)

The purpose of the USDA Home Loan is to provide financial assistance to lower- to moderate-income rural people to purchase a home. Areas with a population of less than 35,000 will qualify according to the USDA’s rural definition.

The USDA home loan offers all the great benefits but there are some disadvantages that you should consider. In this guide, you will find out if USDA is right for you. 

Some downside of USDA

Although the USDA loan has multiple advantages, it has some disadvantages which are worth considering. The biggest drawbacks of USDA loans are income limits and location restrictions.

  1. Income Limits

Eligible candidates for USDA loans are lower to moderate-income applicants. There is a limit to how much you can earn.

The USDA will not only check your income to verify if you are qualifying for a USDA loan, but it will also check your household income. So if you have more than one member in your household, calculate the income of the working people.

Your household’s average annual income should be within 115% of the income limit in your area. Since the income limit varies depending on the size of the family, if your family has 5/7 members then your income limit will be higher.

According to the 2022 income limit:

  • For 1-4 members households: $91,900
  • For 1-4 members households: $119,200
  1. Location Restrictions

Another major drawback to USDA loans is property restrictions. USDA loans are only suitable for rural and suburban areas, but you will not qualify for a loan if your area is part of the city. If the population of your area exceeds 35,000 then it is no longer in the rural area.

Fortunately, 97% of U.S. land is included in the USDA Rural Development Loan’s location restrictions. So if you live in the top 10 most expensive cities in the United States, you may not qualify for a loan.

Suburbs of New Orleans, Lake Charles, Baton Rouge, West Monroe, Lafayette, Alexandria, Shreveport, and other places qualify for USDA loans.

If you want to buy a house, you can qualify for a loan without any downpayment.

  1. Mortgage Insurance

Another benefit of USDA loans is that they have mortgage insurance known as guarantee fees. This is 1% of your loan amount which you can roll into a loan. You have to pay 0.35% of your loan amount every year but it is not known as mortgage insurance. 0.35% annual fee, you can include in your monthly payment.

For example, if you owe $ 200,000, your annual fee would be $ 700, divided by 0.58% per month.

However, USDA’s mortgage insurance fee and annual fee are very low compared to other loans 

  1. Primary Residence

Another drawback is that with cash, you will only be allowed to buy a primary residence. However, the opportunity to buy a second home or investment property without any downpayment is great, but the USDA will not give you that benefit.

Being able to buy a home without a down payment is very risky for the lender or the bank. As such, it does not allow you to purchase a second home or investment property. So if you own a home, you will not qualify for a USDA Rural Loan.

Some requirements:

  • You have to leave the house because there are more family members.
  • You are away from your home for work and the new home is closer to your workplace.
  • You live in a very small house that is not part of the real estate.
  • Your home is not suitable for disabled members.

If you cannot meet these requirements, you will qualify for a loan.

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