A house stands empty in the woods because the owners couldn't handle the disadvantages of a USDA home loan.

Disadvantages of a USDA Home Loan

USDA home loans are favored among some first-time home buyers because they offer special incentives, such as not requiring a down payment, and are open to borrowers with low credit scores. The program is sponsored by the U.S. Department of Agriculture, which like all government offices, requires application process. This is only the first potential problem for borrowers.

  1. Availability for the Loan is Limited

    Although USDA home loans may seem ideal because they don't require a down payment, they are only available to those who want to purchase rural housing. Those who want to live close to cities or in downtown areas are not able to apply for the loan, which limits the amount of people who qualify.

  2. It Requires a Reservation Fee

    Although it may be convenient to put zero down when obtaining financing with a USDA home loan, you'll have to pay more for the property than it's asking price. Borrowers are required to pay 3.5% of the purchase price as a reservation fee. In this sense, Federal Housing Administration loans are often better to obtain because you'll only borrow what you pay for with the property. Conventional loans require a 20% down payment, but they don't require that you pay any more than the asking price.

  3. Applicants Must Meet Strict Income and Credit Guidelines

    Not only are USDA home loans currently required to be on a 30-year fixed rate, but applicants must also meet strict criteria for income and credit. Income eligibility varies depending on the county and size of the household, but is typically limited to applicants with lower incomes. Applicants are also required to have a minimum credit score of 640.

  4. The Property Must Be the Primary Residence

    Those who are looking to invest in property and buy a second home that they can rent out or flip aren't qualified for a USDA loan. USDA home loans require that the property be used as the primary residence for the homeowners, making it unavailable to those looking to buy a vacation home in the country. Although the property must be in a rural area, it may not be used as a farm even with the primary residence within close proximity.

For some borrowers, this loan is still a great program. It is definitely not for everyone, though.

Last Updated: August 13, 2014