Are you looking to buy a duplex but unsure if a USDA loan will help you get one?
USDA loans are often one of the least expensive and easiest ways to get money to buy a home. However, these government-backed mortgages have rules and regulations that can differ depending on which lender you use and where you live.
This article will cover everything you need to know about how USDA loans work. We’ll also discuss what makes USDA loans unique compared to other mortgage options, the requirements for USDA loans, and the pros and cons of owning a duplex.
What Is a Duplex?
A duplex is two houses on one lot, separated by a shared wall. One of the units will be owned by you, while the other can be rented out to cover your mortgage payments. This investment is a great way to build equity and make money simultaneously.
Can You Buy a Multifamily Home With a USDA Loan?
The USDA has loans available to buy multifamily properties to help develop farming communities and provide affordable housing for low to moderate-income families in rural areas. Most groups of people, such as individuals, state and government agencies, tribes, and companies, are eligible to apply for funding.
Here are some more requirements you will need to be approved:
| Uses | Tenant and Housing Requirements | Loan Terms |
|---|---|---|
| New housing construction cost | For individuals or families | Loan amount up to 90% for-profit and 97% for nonprofit |
| Rehabilitation and acquisition of land with housing on it | Rent cannot exceed 30% of 115% of AMI | Up to 40 year fixed to fully amortized |
| Buying existing buildings | Must be in a rural or tribal area with less than 35,000 people | Up to a max of 70% loan-to-cost |
| Construction interest | Property needs to have 5 or more unites | No limit on principle borrowed |
| Development of on/off-site improvements | Must be close to hospitals, shopping, or other essential services |
If you have a multifamily project in mind but want some help getting through the weeds, we can make it easier for you.
Can I Buy a Duplex With a USDA Loan?
USDA loans are made to help people buy homes in rural and suburban areas who might not be able to get conventional loans. This loan can allow you to buy a single-family or multifamily home, including duplexes!
To qualify, you must live in one of the units and rent out the other. In this case, you should still be able to get a loan through this program. The USDA considers any property with more than one unit to be a multi-family home.
If you meet the USDA’s criteria for eligibility, you should be able to buy your dream property with no money down and even refinance it if needed. However, before taking out any loan, make sure you shop around, as each lender has their own rules and interest rates. With careful planning, owning a duplex can be both profitable and rewarding.
Can You Rent a USDA Loan Home?
You can rent out a USDA loan home if you meet the following requirements:
- You must move into the home within 60 days of closing and make it your primary residence.
- You must occupy the home for 12 months after you move in.
- After the 12-month period is up, you can rent it out.
- Check with your lender about rentals before getting approved.
What Are the Requirements for Buying a Duplex With a USDA Loan?
Whether you want to get approved for your duplex or a USDA construction loan, you must meet their specific requirements. These include:
- Having an income at or below the USDA’s median household income limits for your area.
- Your duplex is in the USDA’s eligible rural areas.
- The house must meet minimum standards for health and safety.
- Demonstrating that you have enough monthly cash flow (after making the USDA loan payments) to cover all your living expenses.
- You are a US citizen.
- Have a credit score of around 620, give or take.
- 2 years of steady employment and income.
Is a Duplex a Good Investment for First-Time Homeowners?
USDA loans are ideal for first-time home buyers who want to buy a duplex because:
- They offer competitive interest rates and 100% financing.
- You don’t need to buy mortgage insurance or come up with a down payment.
- A duplex is an ideal investment opportunity for a first-time home buyer because it gets you into the real estate market.
- It gives you an asset that makes you money.
- Offsets your mortgage payments.
- Offers two separate units, allowing you to rent out one half while living in the other half yourself.
Owning a Duplex: Pros and Cons
Owning a duplex has its rewards and some drawbacks; here are some pros and cons explained:
Pros
- Earn extra income
- Rent payments offset mortgage payments
- Your duplex will appreciate over time
- More space
- Tax benefits for being a landlord
- Tenant is close by
Cons
- You have to share your space
- You are responsible for all the repairs
- Rental interruptions
- You could have bad tenants
- Shared wall
Pros of owning a duplex
- You can earn extra income by renting out one side of the house and living on the other. Many people use this strategy to build wealth over time.
- Rent payments can help offset your mortgage payments. Although you might not be able to cover the entire mortgage payment by renting out the other unit, at least it will cover most of it.
- Over time, your duplex will increase in value if you take care of the property and improve it.
- Most duplexes usually have a backyard and more space than a condo.
- Tax benefits for being a landlord. The IRS will allow you to write off expenses such as insurance, mortgage interest, repairs, property taxes, and any operating expenses.
- Your tenant is next door. This will allow you to keep a close eye on your tenant to ensure they aren’t abusing your property which is a landlord’s biggest fear.
Cons of owning a duplex
- You will have to share. Being a landlord that owns a duplex means you will have to share your backyard and privacy.
- Pay for all the repairs. You will need to pay for all the repairs, such as plumbing, heating, and electrical, for you and your tenant.
- Rental interruptions. If your tenant moves out, there may be a month or two when you will be responsible for the entire mortgage until you find another tenant to move in.
- Having bad tenants. There is a possibility that you don’t get along with your tenant, and they can make your life very difficult. Having an uncool tenant is a massive pain in the behind because, depending on where you live, some favorable rules can benefit the tenant. Make sure you either know the person moving in or have done your due diligence.
- Shared wall. Having a shared wall can be super annoying because you will have to hear your tenants moving around and being loud, especially if they are a large family or a loud couple.
What’s the Difference Between a Multifamily Home and a Duplex?
A multifamily home is a property that offers the owner more than two units. It can range from 2–6, or even more, units. A duplex is another type of multi-family home. It has two separate living units next to each other and is connected by a shared wall.
The USDA loan program is one of the best and most flexible ways to get a mortgage. It can be used to pay for a single-family home, a duplex, a triplex, or a fourplex.
The Bottom Line
USDA loans can help you purchase a duplex and start building your wealth. USDA loans have awesome benefits, like competitive interest rates, 100% financing, no down payment, or the need to pay for mortgage insurance. Do your homework before applying for a USDA loan, and make sure it’s the right choice. Buying a duplex can be a great investment opportunity if you know how to handle it properly.
If you have questions or need help, feel free to get in touch. We’re happy to help!
Frequently Asked Questions
Can I buy a duplex with no money down with a USDA loan?
Absolutely! All you would be responsible for are the closing costs.
Can I buy a duplex with bad credit with a USDA loan?
Typically, you would need a credit score of 620 (give or take) to get approved; however, guidelines change all the time, so check with us to make sure!
What are the benefits of buying a duplex with a USDA loan?
You can rent out one of the units to help pay off your mortgage, get tax breaks, increase the property value over time, and build wealth.
Can you rent with a USDA loan?
Yes, you can! If you own a duplex or another type of multifamily property, you would have to live in one of the units and rent out the other.
What can prevent you from getting a USDA loan?
You have lousy credit, you make more money than the average person in that area, your debt-to-income ratio is higher than 43%, the property isn’t your primary residence, and the property isn’t in the approved rural or agricultural area.
Is a USDA loan better than an FHA loan for buying a duplex?
When comparing a USDA loan vs. an FHA loan, the main differences are that with a USDA loan, you need to have a higher credit rating, don’t need to purchase mortgage insurance, and need to buy a home within a specific area. With an FHA loan, you can get approved with a 580 score, but you’ll need to come up with a down payment and purchase mortgage insurance. If you are unsure which loan is better for your situation, we can help!
