If you want to buy a home but do not have the money for a down payment, the USDA loan program might be the answer.
If you are planning to buy a property in a rural area, you could qualify for the USDA program. Your household income should not exceed 115% of the median in the area for you to be eligible, and there are restrictions on the home that can be purchased with this loan.
But before you apply for this type of loan, you need to understand the property requirements you will need to meet to qualify. These USDA minimum property requirements ensure the home is structurally safe, in good repair, and functionally sound.
These conditions might appear to be overly strict, but they do protect the buyer, as well as ensure the USDA is not guaranteeing a loan that is too big a risk.
The first thing you need to check is whether the home is located in an eligible area:
A USDA loan can only be used to buy a property that will be a primary residence located within an area designated as rural by them. Normally, rural areas are considered to be open country that is not part of an urban area. This could mean any town or even city when it is not associated with an urban area.
The neighborhood could even be next to a densely populated area, as long as it is rural in character and the population is less than 10,000. Even areas that share a border can be considered separately for rural classification when their main settled areas are not directly next to each other.
All of these areas also have to have a serious lack of mortgage credit provision for moderate and lower-income families.
Areas that are eligible for USDA loans can change annually. Changing population sizes and other factors affect the eligibility of an area.
The guidelines from the USDA do allow for areas you might not expect to fall within their requirements. However, to be sure whether the area you are looking to purchase a home in is eligible, you can check the exact address or general area on the USDA website.
The home you want to buy must meet certain standards. The USDA has these standards to ensure the borrower is protected, and, should the home foreclose, their interests as well.
Homes that qualify for the USDA program need to be what they consider modest. This means that they should not have a market value above the area loan limit, which is usually 80% of the local HUD 203(b) limit.
The size of the home has to generally be between 400 and 2000 square feet. Homes with smaller square footage, or tiny homes, can be approved if they meet the other standards, however.
The home also needs to have been designed for permanent living, with at least a bedroom, kitchen, dining room, and bathroom. However, it cannot have an in-ground swimming pool, even if this is planned to be removed.
Properties cannot include buildings or land used primarily to generate income. This means farm buildings like barns, commercial greenhouses, and silos unless they are no longer used for their original purpose. However, this does not restrict home-based businesses as long as they do not use commercial buildings.
If the home has solar panels that generate an income, this generally is not an issue. However, if the panels are part of a lease agreement, instead of being included with the home, there are additional conditions.
The home must comply with zoning rules and restrictions. If the property does not comply with current zoning rules but has been accepted by the local authority under previous rules, it will be considered legal non-conforming.
Any home that is to be financed using a USDA loan, needs to meet their quality assurance guidelines. An appraisal is used to provide evidence that the USDA standards have been met.
Appraisals are different for USDA loans compared to appraisals for other types of lending. Along with finding the market value of the home, the appraiser also needs to check that the home conforms to the USDA’s standards.
A qualified independent appraiser will be hired to assess the home using comparable properties to find the fair market value. They also take photographs to show the condition and quality of the place.
The appraiser’s job is to ensure that the USDA standards are met. The appraiser will use the guidelines in the HUD’s Single Family Housing Policy Handbook to ensure the home meets the standards. These standards mean the appraiser will check the following:
If these minimum property requirements (MPR) are not met, repairs will be needed before the USDA home loan will be approved.
Normally, the seller will have to pay for the repairs, though if they do not agree to this, the buyer has to make a choice. They can walk away, with their earnest money returned if covered by a contingency, or pay for the repairs themselves. If the buyer does choose to pay for repairs, the loan might still not be approved, however.
Getting a USDA home loan can be an excellent way for buyers in rural areas to purchase a home with little or no down payment. However, one key part of the USDA loan process is the strict property inspection requirements. In this comprehensive guide, we’ll take a detailed look at exactly how rigorous USDA inspections are, what the inspectors look for, and what happens if you don’t pass.
An Overview of USDA Loan Inspections
The USDA mandates thorough inspections for all properties financed by USDA home loans. The purpose of these inspections is to verify the home is structurally sound, safe, healthy, and durable enough to serve as long-term housing.
While minor cosmetic flaws like old carpets or mismatched trim are acceptable, any issues that could impact the home’s structural integrity or ability to function properly must be addressed. The inspectors use clear standards outlined by the USDA to evaluate properties.
Inspections are done by specialized USDA appraisers not general home inspectors. They focus heavily on safety and function over aesthetics. Read on for more details on exactly what they look for.
Key Areas the USDA Inspectors Examine
USDA appraisers conduct a comprehensive inspection, evaluating all areas of the home against the USDA’s eligibility criteria. Here are some of the key elements they examine:
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Structural Integrity: Inspectors check for any signs of foundation cracks or damage,roof leaks, deteriorating siding or trim, holes, and other structural deficiencies.
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Functioning Utilities They verify all utilities like electric, plumbing, heating, and cooling systems are adequate, safe, and in working order. This includes things like water pressure, venting, and wiring safety
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Major Systems Furnace, water heater, septic tank (if applicable), and major appliances are checked to ensure they are operating properly with no leaks, major rust, or other hazards.
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Accessibility: Inspectors confirm all crawlspaces and attics can be accessed.
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Infestations: They check thoroughly for any evidence of termites, wood damage, or other infestations.
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Paint: Peeling or chipped paint will need to be remedied, especially in older homes where lead paint is a concern.
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Compliance: They confirm the property meets all local building codes, zoning laws, health codes, and USDA rural location requirements.
As you can see, the inspection is extremely comprehensive. The property must pass all requirements to move forward with a USDA loan.
What Happens If You Don’t Pass the Inspection?
If issues are found during the inspection, you will have several options:
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Request repairs from the seller: For minor issues, the seller may agree to make repairs before closing.
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Renegotiate the price: You can try to negotiate a lower purchase price to cover future repair costs.
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Finance repairs in your loan: Depending on the type of repairs needed, you may be able to roll the costs into your loan amount.
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Pay for repairs yourself: If the seller won’t make the repairs but you still want the home, you can cover costs out of pocket.
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Seek a repair agreement: In some cases, both parties may split repair costs.
If significant safety issues are found and a resolution can’t be reached, you may have to walk away from the property and look for another option.
Tips for Passing a USDA Inspection
Here are some useful tips to prepare for a smooth USDA inspection:
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Conduct your own pre-inspection: Doing a thorough walkthrough yourself first can help you identify and remedy minor issues early.
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Review with your real estate agent: Discuss any potential red flags for USDA loans with your agent before making an offer.
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Check for lead paint: Have the home tested for lead if built before 1978 and repaint any areas as needed.
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Repair visible defects: Fix any cracked windows, leaks, loose railings, dripping faucets, etc. – don’t wait for the inspection.
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Update systems if needed: Replace very old furnaces, electrical panels, appliances, etc. that may raise safety concerns.
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Clean up and declutter: While not required, a tidy home can create a good overall impression.
Reasons a Home May Fail a USDA Inspection
To give you an idea of potential issues that could lead to inspection failure, here are some examples:
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Major foundation cracks or signs of settling.
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Roof damage, curling shingles, or more than 3 layers of roofing material.
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Water damage or leaks anywhere in the home.
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Improperly vented appliances like furnaces or water heaters.
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Electrical issues like exposed wiring, sparking outlets, etc.
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Lack of railings on stairs or loose deck boards.
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Septic systems not meeting local health code standards.
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Heating or plumbing not adequately functioning.
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Extensive termite damage or active infestation.
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Lack of access to attic/crawl spaces per USDA guidelines.
Most failed inspections result from deficiencies that may impact the home’s structural integrity or safety over the long run. Minor cosmetic flaws can often be addressed separately.
Key Takeaways on USDA Inspection Strictness
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Inspections are mandatory for the loan and thoroughly examine all areas of the home.
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Inspectors use clear, strict USDA standards to pass or fail properties. There is little room for subjectivity or negotiation.
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The focus is structural and safety issues, not cosmetic appearance. Still, chipping paint and other visible flaws will need repair.
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Major defects must be repaired or the loan will not be approved, unless an alternate resolution like a lower price is reached.
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Being prepared can help, but unexpected issues can still arise, requiring compromises.
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Walk away if big problems exist that you can’t appropriately address within the purchase terms. Don’t get stuck with a money pit.
While the strict inspection process can occasionally create hiccups, it ultimately protects buyers from ending up with unsafe, unsound homes when using USDA financing. Being aware of their rigorous requirements from the start allows for a smoother loan experience.
Does this help explain USDA inspection strictness and process?
Types of Homes Eligible for USDA Loans
The USDA will accept many different types of homes in its loan program as long as they meet their minimum requirements. These include existing homes, new constructions, modular, manufactured, condos, townhouses, and foreclosed homes.
Let’s look at two of these types in more detail:
A home that has been constructed for 12 months or more, is considered an existing dwelling. The USDA does not require a home inspection before the loan is approved, though it is normally advisable. A home inspection is a more detailed examination than an appraisal and offers more peace of mind for the buyer.
An existing home has to be decent, safe, and sanitary (DSS). This means it needs to be in good repair, functionally adequate, and structurally sound. The appraiser or inspector will produce a report to show whether the home meets the DSS requirements concerning:
- Termites and other pests
- Plumbing and sewage
- Heating and cooling
- Electrical systems
- Structural integrity
If the appraisal indicates there could be some issues, additional inspections could be required. If there are signs of termites in the home, the lender could call for a termite inspection before they will approve the loan.
If any problems have been noted within these categories that mean the home does not meet the DSS requirement, they must be fixed before closing. Problems that are not considered critical, can be repaired by the seller either before or after closing.
If you are using a USDA loan to fund new construction, you will need to have a building permit or certification from a qualified organization to show that your plans meet current development standards.
The new home needs to be inspected at least three times during the different phases of construction. These can occur when:
- The foundations are ready to be poured
- When the shell of the home is complete but before the electrical and plumbing systems are covered
- When the home has been completed but before occupancy
A manufactured or prefabricated home only needs the foundation and the final inspections to meet the requirements. The builder has to provide a 1-year warranty acceptable to Rural Development.
If it is not possible to inspect foundations, perhaps because they have already been poured, a final inspection and a 10-year insured warranty from the builder are also acceptable.
There needs to be evidence that the minimum thermal standards have been met. The International Energy Conservation Code standards at the time of construction need to be followed. These standards can be confirmed during the final inspection or through a Certificate of Occupancy. They can also be certified by the builder, an architect, or another qualified person.
USDA repairs and inspection
FAQ
How strict is the USDA appraisal?
What disqualifies a home from the USDA financing quiz?
Do USDA loans get denied in underwriting?
Is USDA more strict than FHA?
Do you need a home inspection for a USDA loan?
Home inspections are not required by the USDA for loan approval. Is a Home Inspection Required for a USDA loan? The USDA does not require home inspections for loan approval. Still, they are highly recommended to provide buyers with peace of mind about their investment, prevent costly repairs, and assist in seller negotiations.
Do I need a termite inspection for a USDA loan?
“Termite/pest inspections are not required unless the lender, appraiser, inspector or State law requires the inspection to confirm the property is free of active infestation,” according to the appraisal/inspection guidelines of the USDA.
How do I get a USDA guaranteed loan?
For USDA guaranteed loans, contact an approved lender for property and inspection requirements.
What happens if a USDA inspection fails?
Sometimes, repairs can be integrated into the loan terms. A failed USDA inspection indicates that the property does not meet specific health, safety, or structural standards set by the USDA. This failure can result from various issues, ranging from significant structural problems to minor, but essential repairs.