The USDA guidelines would have you believe that you can only use your USDA home loan eligibility one time. Technically, this is true, but there is a loophole. Looking at it in the literal sense, yes, you can only use the USDA loan once at a time. However, everyone is eligible to sell their current home with USDA financing, pay off the loan and secure another USDA loan for their next home. This is just like any other loan program. There is a way you can use your eligibility twice without paying off the first loan, though. You have to carefully follow the USDA’s guidelines to be able to do so, but it is possible.
The Definition of a Second Home
First, we should look at the definition of a second home. Technically, this means a home you visit occasionally. It is not the home you live in all year round. Some people call them summer homes or vacation homes. However you look at it, they are not your primary residence where you spend a majority of your time. These homes, under no circumstances, can be financed with a USDA loan.
Buying Another Home
Even though you can only use the USDA loan for your primary residence, you can use your USDA home loan eligibility twice without selling your first home. This may occur when one of the following pertain to you:
- You have to move because your job relocated you. If the new job is more than 50 miles away from your current home, you can consider it an unreasonable distance. At this point, you can apply for USDA financing again without selling your current home. You may rent out your current home in order to help you cover the expense of having two mortgages.
- You outgrow your current home. Let’s say you bought your current home when it was just you and your spouse. Now you have 3 children. If your first home does not accommodate everyone comfortably, you may be able to rent your home out and purchase another home with a USDA loan.
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Using Your Rental Income to Qualify
The kicker to the situation is that you have to be able to qualify for the second USDA loan with your original mortgage in the debt ratio too. This may be too much for your income to handle, especially since USDA loans are for low-income families. You may be able to use the rental income you bring in, but you have to have two years’ worth of the rental income reporting on your tax returns before you can use it. In addition, the rental income increases your total household income, which could increase your eligibility income too high.
Understanding the difference between the eligibility income and qualifying income for a USDA loan will help you in this situation. Your eligibility income is the money every member of your household brings into the home. This includes any parents, grandparents, or older children who make a living. The USDA totals everyone’s income to see if your household income is above the allowed amounts for your area. You can see these amounts here. As far as your rental income is concerned, though, you may be able to lower the amount if you use a third party management company to handle the rental or with any depreciation you claim on your tax returns.
Your qualifying income is the income you and your co-applicant make – the rest of the household does not count for this part. This is where you actually qualify for the loan and where your debt ratio needs to be around 29/40 in order to obtain an approval. With two mortgages, this might be tight, so make sure you maximize your income before you apply for your second USDA loan.
Meeting the USDA Home Loan Eligibility Guidelines
It might seem like everything said here goes against what the USDA states, but the exceptions to the rule are not commonly known. Yes, you may only have one USDA loan at a time, but the fine print states:
- You can only own one home within the defined commuting area (in this case 50 miles)
- You can only own one adequate home. This means one home that is safe, sanitary, and meets the needs of your family’s size. If you were to outgrow the size of your home, you may own another home in the same area with a USDA loan with approval.
In order to use USDA home eligibility twice, you have to be willing to jump through some hoops. The USDA has to verify not only that you are not over the allowed income limits for your area, but also that your commute is more than 50 miles for your new job, if this is the case. If you outgrew your home, the underwriter will need specifics regarding the size and layout of the current home and why you outgrew it. In either case, you are at the mercy of the underwriter and the USDA, but if you have plenty of evidence regarding your reasons, you may be able to secure an approval.
Using your USDA home loan eligibility twice is not an easy task, but it can be done. The USDA created their program to help stimulate the economy of rural areas that would otherwise get overlooked. They typically only provide one loan per person at a time, but will grant the exceptions as stated above. If you think you deserve a second USDA loan, make sure to adequately state your case and provide enough evidence to show you are worth the second loan. Your hard work and persistence will pay off. Also, make sure you use a lender experienced in USDA lending. A lender who only occasionally dabbles in the loan program might only accept applications for those who don’t have a current USDA loan. If you need a second one, shop around until you find a lender willing to give it a try.