The United States Department of Agriculture (USDA) has a number of programs to help new homeowners. Among them is the USDA Rural Housing Renovation Loan Program, which offers low-income buyers the opportunity to purchase and fix up homes in rural areas. If you have a low income and you've had trouble obtaining financing elsewhere, the USDA rehab loan program may benefit you.
What is a USDA renovation loan?
USDA renovation loans help low-income families and individuals buy USDA-owned homes. The USDA owns a lot of older homes that need repair. Through the USDA Rural Housing Renovation Loan Program, buyers can get financing to own and repair these homes. This USDA housing program comes from Section 504 of the USDA Escrow Holdback Loan Program.
Many USDA properties must be repaired as a condition of financing. Through the USDA Escrow Holdback Program, you can get money for financing and repairs in one loan, reducing fees and hassle.
A loan through the USDA Repair Escrow Holdback Rehab Program allows you to borrow 100% of the purchase price for the home and an additional 2% of the home’s value for repairs. If you bid lower than the value of the home, you’ll have even more money for repairs — the USDA will still allow you to borrow 102% of the home’s value.
What are the benefits of the USDA renovation loan program?
Benefits of USDA home renovation loans include:
- 102% financing or refinancing for first-time and repeat home buyers
- Low interest rates
- No reserve requirements
- No maximum loan amount
- Acceptance of income from self-employment
- No mortgage insurance requirement
- Fixed-rate mortgage
- Ability to finance repairs
- Financing for low-income individuals
- Grants for people ages 62 and above
Where do you have to live to get a USDA rehab loan?
USDA loans are available in areas the USDA has designated as rural. However, this doesn’t mean you’ll have to live in a remote area to get a USDA renovation loan. In many parts of America, homes located outside of major cities are considered “rural” by the USDA. Sometimes suburbs and areas just outside city limits can qualify for a USDA home improvement loan.
What are the USDA rehab loan requirements?
USDA rehab loans are for low-income families and individuals. To qualify for a Section 504 loan, you must make below 50% of the area’s median income, and you must be unable to obtain affordable credit elsewhere.
According to USDA renovation loan requirements, the property must be a home, not a farm or other income-generating property, and the homeowner must occupy the house.
What kinds of repairs can I make with a Section 504 loan?
Eligible repairs for a USDA property include:
- New flooring
- Plumbing repairs
- HVAC repairs
- Roof replacement or repair
- Removal of lead-based paint
- Fixes for structural or foundational issues
- Repairs for electrical defects
- New exterior doors
- Repairs for flood-prone basements
How can I apply for a USDA rehab loan?
Applying for a USDA loan takes several steps. For help navigating this loan process, consider connecting with a local real estate agent who can walk you through each step.
1. Pre-qualify with a USDA-approved lender
Hundreds of lenders offer USDA loans, so you’ll want to do your research on local USDA-approved lenders. It’s best to work with lenders who specialize in USDA home loans.
Once you find a lender, you need to pre-qualify. Pre-qualification is a fairly simple process that ensures you’re eligible for the program and provides an estimate of what you can afford.
2. Apply for pre-approval
Pre-approval is a more thorough process than pre-qualification. For this step, your lender will verify information about your income and finances and determine how much you can actually borrow. Your lender determines how much you can borrow by calculating your debt-to-income (DTI) ratio, which shows how much of your monthly income goes toward expenses.
3. Find your USDA-approved home
If you aren’t already working with a real estate agent, you'll want to find one at this step. A local agent with USDA renovation loan expertise can help you find a USDA-approved home.
4. Sign your purchase agreement
Once you find your home, you’ll work with your lender and agent to make an offer and negotiate closing costs. Then you'll sign!
After you and the seller sign the purchase agreement, your lender will order a USDA home loan appraisal to ensure the home meets USDA standards.
5. Complete the loan underwriting process
At this point, an approving loan underwriter will review all of the paperwork and documentation.
Underwriting and processing for USDA renovation loans can take longer than traditional mortgages because the USDA program uses a two-party approval system. First, lenders underwrite the renovation loan to make sure it meets USDA requirements. Then the USDA underwrites the file.
6. Close on your loan
Loan closing is your final step! At closing, you’ll sign all of the paperwork, finalize your USDA rehab loan, and take ownership of your new home.
How do I know if I should get a USDA rehab loan?
If you're considering purchasing options, including whether or not to buy a property in need of repairs upfront, connect with an experienced real estate agent. The right agent will provide guidance, help evaluate properties, uncover additional cost savings, and help you find the right contractor.
If you’re a low-income family or individual, contact a top-rated local real estate agent today to talk about whether a USDA Section 504 loan might be right for you.
Frequently asked questions about USDA renovation loans
Yes, you can use a USDA renovation loan to buy a fixer-upper. However, you need to follow certain requirements. The estimated cost of the renovation cannot be more than 10% of the loan amount, and the renovations must be completed within 180 days of closing.
Typically, the home requires only non-structural repairs, but you can do some structural repairs as well. The USDA home improvement loan also requires that the house is habitable, with the homeowner living in the home.
A number of conditions disqualify a home from receiving USDA funding, including:
- Missing plumbing, carpet or tile, or furnace or heating unit
- A roof in disrepair
- Safety and health hazards
Sometimes a house doesn't qualify for a USDA loan when less serious conditions are present, such as dirty or old carpeting and walls, older or less efficient windows and doors, or an out-of-date design.
As you look for a USDA renovation loan option, you may not qualify for a USDA loan for certain financial reasons. This can include debt, an employment change, appraisal issues, and high interest rates. The minimum credit score to qualify for a USDA rehab loan is 640.
The maximum square footage for a USDA renovation loan is 2,000 square feet. While the house cannot exceed this size, there is no maximum acreage limit for USDA rehab loans.
No, a down payment is not required for a USDA rehab loan. However, making a down payment can help reduce your monthly mortgage cost. If you need financial assistance with a down payment, you could take out a down payment loan. But note that doing so could affect your credit and negatively impact your loan eligibility.