USDA Rehab Loans: What Are They and How to Apply

By 

Clever Real Estate

Updated 

March 26th, 2019

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The United States Department of Agriculture has a number of programs to help potential homeowners. The USDA Rural Housing Renovation Loan Program helps low income families buy and fix up new homes that are designated as rural. Learn more about the USDA rehab loan program today.

Believe it or not, the United States Department of Agriculture (UDSA) provides a lot of help to new homeowners. The USDA Rehab Loan program offers low-income buyers the opportunity to purchase and fix up homes in rural areas. If you have a low income and have had trouble obtaining financing elsewhere, the USDA Rehab Loan program may be for you!

What is a USDA Rehab Loan?

The USDA owns a lot of land and a lot of homes. Many of the homes they own are older and in need of repair. The USDA Rural Housing Renovation Loan Program comes from Section 504 of the USDA Escrow Holdback loan program. This program helps low-income buyers buy their homes through the USDA housing program.

Many USDA properties must be repaired as a condition of financing. Through the USDA Escrow Holdback program, you can get the money for financing and repairs as part of one loan, reducing your fees and hassle.

A loan through the USDA Escrow Holdback Rehab Program will allow you to borrow 100% of the purchase price for the home and add on 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 a USDA Rehab Loan?

Among the many benefits to USDA loans are:

  • 102% financing/refinancing for first-time and repeat home buyers
  • Low-interest rates
  • No reserve requirements
  • No maximum loan amount
  • Income from self-employment accepted
  • No mortgage insurance required
  • Fixed-rate mortgage loan
  • Ability to finance repairs
  • Financing for low-income individuals
  • Grants for people age 62 and above

Where do you have to live to get a USDA 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 loan. Oftentimes, properties located in suburban areas or just outside of city limits can qualify. In many parts of America, homes located outside of major cities are considered “rural” by the USDA.

What are the Requirements to Get a USDA Rehab Loan?

USDA rehab loans are for low-income families and individuals. To qualify for a Section 504 loan, the homeowners must be unable to obtain affordable credit elsewhere. Homeowners also must have low income, below 50% of the area’s median income.

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 Be Made With a Section 504 Loan?

Some of the types of repairs you can expect to make to an older USDA property include:

  • New flooring
  • Plumbing repairs
  • HVAC repairs
  • Roof replacement or repair
  • Removal of lead-based paint
  • Structural or foundational issues
  • Electrical defects
  • New exterior doors
  • Repairs to flood-prone basements

How Do You Apply For a USDA Loan?

Applying for a USDA loan is several steps. For help navigating this process, consider connecting with a local real estate agent, who can walk you through each step.

1. Pre-qualify with a USDA-approved lender.

There are hundreds of lenders who 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 loans and know the ins and outs.

Once you find a lender, it’s time to pre-qualify. Pre-qualification is a fairly simple process that will ensure you’re eligible for the program and provide a general estimate of what you can afford.

2. Apply for pre-approval.

Pre-approval is a more thorough process than prequalification. For this step, your lender will verify information about your income and finances and determine how much you can actually borrow. This is determined by calculating your debt-to-income (DTI) ratio, which shows how much of your monthly income goes towards expenses.

3. Find your USDA-approved home.

If you aren’t already working with a real estate agent, this step is time to find one. A local agent with USDA loan expertise can help you find and close on your dream home.

4. Sign your purchase agreement.

Once you find your home, you’ll work with your lender and agent to make an offer. This is also time to negotiate on closing costs. Then you sign!

After you and the seller sign the purchase agreement, your lender will order a USDA loan appraisal, to ensure the home meets USDA standards.

5. Complete loan underwriting process.

At this point, an underwriter will review all of the paperwork and documentation.

Underwriting and processing for USDA loans can take longer than traditional mortgages because the USDA program uses a two-party approval system. First, lenders underwrite the 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 loan, and take ownership of your new home.

What Should You Consider Before Getting a USDA Rehab Loan?

Buyers considering purchasing options, including whether or not to buy a property in need of repairs up front, should connect with an experienced real estate agent as a first step. 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.

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