The USDA Loan program has very specific requirements pertaining to the property being purchased. First off, the property must be located in a designated USDA eligible area. To determine if the property is in an eligible USDA area, follow these instructions:
- Go to the USDA Rural Development Website
- On the top toolbar click on “Single Family Housing Guaranteed”
- Click on “Accept”
- Enter the property address to determine if a specific house is located in an USDA eligible area
- Once you enter a property address you can manipulate the map to identify other eligible areas
- This website isn’t mobile enabled so it will not function properly on a smart phone
Assuming that the property is located in an eligible area there are additional requirements to consider; including the following:
Income Producing Properties
Prior to making an offer on a house, home buyers and their Realtors should consider if a property can be potentially income producing, which is unacceptable to USDA. The key word is “potential”, not what the new homeowner intends.
For instance, agricultural structures such as a large barn, large horse stalls, or chicken coop imply the property can potentially be income producing. Also, a property with a duplex, Mother-In-Law suite, or a mobile home on the lot can potentially earn rental income making the property ineligible for USDA financing.
At times the lender will evaluate the property as income producing based on the borrower’s profession. For instance, a large multi-car garage can be desirable for a car enthusiast (and allowed), but the same garage in which the borrower is a mechanic may be construed as the borrower wanting to fix cars as either a primary or side job; thus, causing the property to be considered income producing.
House Value Vs. Land Value
USDA wants the primary value of the purchase price to be applied to the value of the actual house and not the property’s land value. As such, USDA requires that the appraiser assign a breakdown of the property value to the house and to the land. Should the land value exceed 30% of the appraised value, the property will be ineligible for USDA financing, unless the following two tests are met:
- The appraiser must state that the size of the lot is typical for that area; AND
- The property cannot be subdivided.
Defining what is “typical” will differ from area-to-area. There are parts of the country in which the property size can be 20 to 50 acres and considered normal for that area. Other times, a typical property size may only be an acre; thus, making a five-acre property ineligible for USDA financing.
Stating whether a property can be subdivided is far less subjective. While the appraiser might simply state based on their knowledge of the local area that a property cannot be subdivided, the appraiser might also state that they have no way of knowing one way or another. In these situations, the local County Zoning Department can provide documentation to support that the property cannot be sub-divided.
No Fixer Uppers
Lastly, the USDA Loan program is designed for homes that are in move-in condition. In other words, the house should not be a fixer-upper. However, there are some circumstances in which a renovation budget can be established to pay for small repairs after settlement. In order for a repair to be completed as part of a repair/renovation budget, the repair must be (1) required by the appraiser, (2) not preclude the buyer from occupying the house right after settlement, and (3) be minor in nature (i.e. cost, time of repair, etc.).
To learn more about the Maryland USDA Guaranteed Loan program please call (410) 567-0994.