The USDA offers two renovation loan programs that can help you pay for home repairs with little to no money out of pocket — one for buying a fixer-upper and one for repairing a home you already own.
As more people leave big cities for rural areas, homes there are becoming more desirable. But many of these homes need work, and the buyers who want them often can't afford both a mortgage and repairs.
The two programs — Section 504 Home Repair and USDA Escrow Holdback — are designed to fill that gap. Most people have never heard of either one, and the details can be confusing. Below, we'll break down who qualifies, what the money can be used for, and how to get started.
What are USDA renovation loans?
The USDA offers two renovation loan programs: Section 504 Home Repair and USDA Escrow Holdback.
If you already own your home and need to make repairs but can’t afford them, the Section 504 Home Repair loan program is designed for you.
It lets you repair, improve, or modernize your home or remove hazards to your health and safety.
If you’re buying a home that needs work, the Escrow Holdback program lets you bundle repair costs into your purchase loan. It’s available through the USDA’s Section 502 Direct Loan Program.[1]
Who qualifies for USDA renovation loans?
Whether you’re applying for a Section 504 Home Repair loan or an Escrow Holdback, there are four main criteria for qualifying. Erin Gros, a loan officer with American South Mortgage Lending in Louisiana, said it’s crucial to be upfront about your household members and your financial situation in your application.
1. Income
Section 504
Your income must be less than half the area median income (AMI). That means that if the median household income in your county is $60,000, your household needs to earn less than $30,000 to qualify. You can use the USDA’s income eligibility tool to check your specific county.
Escrow Holdback
Your income can’t exceed 115% of the AMI. If you have 1 to 4 people in your family, you can’t earn more than $119,850. The income limit rises to $158,250 if there are 5 to 8 people in your household.
If you’re over the income limits for either program, Gros said there’s still hope. Submitting a letter from your employer can sometimes help, or you can consider some USDA income deductions for elderly family members, dependents, or medical expenses.
“There are some cases where sitting down with your loan officer and reviewing the ‘income calculation’ can make a big difference,” she said.
2. Location
While these loans are for rural areas, “rural” doesn’t mean remote — many small towns and even some suburbs qualify. Enter the address into the USDA’s property eligibility map to see if it’s eligible.
If the property falls outside the eligible area, you could ask the USDA to review its location, though Gros said this is uncommon and unlikely to change.
“The best course of action in this case would be for the borrower to explore other renovation loan options, such as an FHA 203(k) loan or a Conventional HomeStyle Renovation loan,” she said. “Or the borrower can also view other properties in areas that are eligible.”
3. Credit
Section 504
You’ll typically qualify if your credit score is at least 620. But you may be able to get a loan even if it falls below that threshold — the loan originator will just need to do a full credit review involving multiple sources.[2]
Escrow Holdback
A credit score of at least 640 is required for an Escrow Holdback.[3]
4. Property
Generally, the USDA requires that homes be safe and livable. Major systems (plumbing, electric, HVAC) must also be operational. Keeping these guidelines in mind as a starting point can help you find properties that are more likely to be approved.
“The trick is to focus on homes that are already in good condition,” said Ryan Fitzgerald, a real estate expert and founder of Raleigh Realty in North Carolina. “Homes that need significant repairs can be problematic.”
Section 504
The property must be your primary residence. Income-producing properties or accessory dwelling units (such as in-law apartments or other separate living spaces) aren’t eligible. Also, the home can’t be in a flood zone or have an in-ground pool.
Escrow Holdback
The property must be considered modest for the area, and its market value can’t exceed the area’s loan limit.[4]
A quick way to check if you qualify
Run the address through the USDA property eligibility map. Use the USDA income tool to check your county’s AMI against your household income.If both pass, contact your local USDA Rural Development office to discuss the required credit score.
What can (and can't) I use the money for?
The USDA has strict guidelines for what you can and can’t use your loan for. Let’s break down what repairs are eligible and which ones aren’t.
Eligible
For a Section 504 loan, qualifying repairs include:
- New flooring
- Major system repairs (plumbing, HVAC, electrical)
- Roof replacement or repairs
- Lead-based paint removal
- Structural or foundational repairs
- New exterior doors
- Repairs to flood-prone basements
If you qualify for a Section 504 grant, you can only use it to remove health and safety hazards or make accessibility improvements.
Gros said the advantage of the USDA Section 504 program is that you can find a “diamond in the rough” and make the home just what you want or need it to be.
“Whether that’s renovating/updating the home, adding square footage, or if it’s a foreclosure with some damages that need repairing — this can all be done with a Section 504 and the borrower taking little to no additional funds out of their own pocket,” she said.
You can use Escrow Holdback funds to:
- Upgrade or modernize the home
- Make the property accessible to those with disabilities
- Make structural changes, such as adding a bedroom
- Install energy conservation or weatherization features
- Repair major systems
- Remove safety and health hazards
- Repair existing amenities like pools or saunas
- Make minor repairs that are required as a condition of financing
Not eligible
You cannot use Section 504 loans or Escrow Holdback funds to:
- Build a new home or purchase a new property
- Make improvements that aren’t directly connected to the structure, such as landscaping or driveway work
- Make luxury upgrades or add on recreational spaces
- Improve an income-producing property like a rental home
- Pay off existing mortgages or loans
In practice, you can replace a failing plumbing system, but you can’t install a new shower backsplash. You can replace unsafe or uneven flooring, but you can’t put in new carpets just because you don’t like the old ones.
A good rule of thumb is that repairs must enhance the home’s livability and/or safety. Cosmetic fixes or “updating the look” don’t qualify.
How to apply for a USDA renovation loan
Step 1: Check your eligibility
Use the USDA’s map and income tools (linked above) to make sure both qualify. Don’t skip this step — it’s easy, takes 10 minutes, and will save you weeks.
You’ll have to answer a few questions about your income and household. To check the location, you’ll only need to enter the property’s address.
The USDA also encourages potential applicants to complete an informal prequalification process (Form RD 3550-35). This can help you determine if the renovation loan is right for you.
Step 2: Contact your local USDA rural development office
Use the USDA’s office locator tool to find your local office. If you’re applying for a Section 504 loan, this is where you’ll submit your application — not through a traditional lender.
Section 504 applications are available year-round as long as funding is available. They’re processed in the order in which they’re received, so apply as early as you can.
For an Escrow Holdback, you’ll work through an approved USDA lender. Your local USDA office can help you find one. Applications are accepted year-round.
Step 3: Gather your documentation
Use these checklists to ensure you have the necessary paperwork and documents for each applicant:[2]
Step 4: Go through the appraisal and approval process
For both loans, you’ll have to complete a two-party underwriting process. The lender is the first party, and it typically goes through the process twice — once for your initial approval, and then a second time for the final underwrite of lender “conditions” and to issue a final approval.
The file is then submitted directly to the USDA for the second-party underwrite. (Note that for a Section 504 loan, your local USDA Rural Development office will handle the entire two-party underwriting process.)
Gros said the approval process can take anywhere from 24 hours to 7–10 days, depending on the turnaround time listed on the USDA website. She noted that the average approval timeline over the past 12 months has been 1–3 days.
Step 5: Get bids from eligible contractors
The USDA requires licensed contractors to complete the repairs — you cannot do the work yourself. Get multiple bids to ensure you get competitive prices that don’t exceed your loan limits.
It’s also wise to work with contractors who have experience with USDA loans. They can help you navigate the complicated process.
Step 6: Close and complete repairs
With a Section 504 loan, the funds are disbursed once your application is approved, and the work can begin. From application to funding, Gros said a realistic timeline would be around 45 days.
“There should be an expectation to build in some extra time due to the complexity of a renovation loan and the additional professionals who will be involved in the process,” she said.
For an Escrow Holdback, you must generally complete repairs within 180 days of closing. If work is not completed, your lender may consider the loan to be in default. Not only will your credit score take a serious hit, but you’ll likely have to pay off the remaining balance. The USDA could foreclose on the property, garnish your wages, or even withhold government benefits to get its money back.
USDA renovation loan vs. other fixer-upper financing options
USDA renovation loans have two common alternatives: FHA 203(k) and Fannie Mae HomeStyle.
If both your income level and your property location qualify for a USDA renovation loan, it’s hard to beat a zero down payment. Otherwise, an FHA 203(k) or HomeStyle loan gives you more flexibility in the repairs you can make.
The FHA 203(k) is ideal if you have poor credit but need to make major renovations. But you can borrow more with a HomeStyle loan. It covers up to 75% of either the home’s purchase price plus renovation costs or the after-repair value — whichever is less.
