USDA loans come with great benefits, but not all homes are eligible. All homes financed by a USDA loan must first meet the minimum property standards set out by the Department of Housing and Urban Development.
These ensure borrowers are getting a functional, safe and sound home to live in. Let’s look at the requirements more in-depth.
Buying a fixer upper can be an affordable way to get into homeownership. With some elbow grease and renovation know-how, you can turn a rundown house into your dream home. But finding financing for a home that needs repairs can be tricky. That’s where USDA fixer upper loans come in.
In this comprehensive guide, we’ll cover everything you need to know about using USDA loans to buy and fix up homes in rural areas Here’s what we’ll discuss
- What is a USDA fixer upper loan?
- Who is eligible for a USDA rehab loan?
- What are the benefits of USDA fixer upper loans?
- How can the funds be used?
- What are the loan terms and amounts?
- How do you apply for a USDA renovation loan?
- What loans can you combine with a USDA loan?
- Tips for choosing the right fixer upper property
- FAQs about USDA fixer upper loans
Let’s get started!
What is a USDA Fixer Upper Loan?
USDA fixer upper loans, also known as Section 504 loans, are a type of mortgage offered by the United States Department of Agriculture (USDA). These loans help low-income buyers purchase and renovate homes in eligible rural areas.
With a USDA rehab loan, you can buy a rundown property and get financing to cover purchase costs and repairs through a single mortgage. This removes the need to take out multiple loans for buying and fixing up the home.
The USDA offers these loans as part of its Rural Housing Service program. They come from Section 504 of the Housing Act of 1949. The purpose is to help provide affordable housing for rural residents.
Who is Eligible for a USDA Fixer Upper Loan?
To qualify for a USDA renovation loan, you must meet certain eligibility criteria:
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Income – Your household income must be below 50% of the area median income limit. The exact limits vary by county and household size.
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Credit – You’ll need a credit score of at least 640 to qualify.
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Location – The home must be located in an eligible rural area as defined by the USDA property eligibility tool. Generally, small towns and remote areas qualify.
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Occupancy – You must intend to move into the home as your permanent residence. USDA loans are for primary residences only.
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Repayment ability – You must demonstrate you can repay the loan. The USDA will review your debt-to-income ratio.
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Citizenship – You must be a U.S. citizen, U.S. non‐citizen national, or Qualified Alien.
If you meet these requirements, you’ll likely qualify for a USDA fixer upper loan!
What Are the Benefits of USDA Fixer Upper Loans?
USDA renovation loans offer homebuyers several advantages:
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Low interest rates – USDA loans often have lower rates than conventional mortgages. The exact rate will depend on your finances.
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Low or no down payment – You may qualify for 100% financing so you don’t need a down payment.
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No mortgage insurance – No monthly mortgage insurance payments required.
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Lenient credit guidelines – Credit standards are more flexible than conventional loans.
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Extended terms – Loan terms up to 33 years are available, making payments more affordable.
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Single loan – One loan to cover purchase price and renovations.
Using a USDA loan to buy and remodel a fixer upper can save you thousands in mortgage costs!
How Can the Funds Be Used?
With a USDA fixer upper loan, you can purchase a run-down home and renovate it. Here are the specifics:
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You may borrow up to 100% of the home’s appraised value after renovations are complete. This covers both the purchase price and rehab costs.
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Renovation costs cannot exceed 10% of the total loan amount.
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Funds can be used to remodel, repair, or modernize the home. Examples include:
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Replacing old plumbing and electrical
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Installing new floors
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Remodeling kitchens and bathrooms
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Adding rooms like bedrooms or baths
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Fixing major HVAC and roofing issues
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You cannot use the funds to buy new appliances or furniture – only permanent home improvements.
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Repairs must be completed within 180 days of closing. You’ll place a portion of funds in an escrow account and release them as work is finished.
What Are the Loan Terms and Amounts?
USDA fixer upper loans come with flexible terms to make borrowing affordable:
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Loan amounts – No limit on how much you can borrow, as long as it is within your repayment ability.
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Interest rates – Fixed rates are set by the USDA and are typically below market averages.
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Loan term – Up to 33 year repayment terms. Longer terms have lower payments.
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Down payment – None required. You may qualify for 100% financing.
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Closing costs – These can be rolled into the loan amount.
The long terms and low rates make USDA loans a budget-friendly option for financing home renovations.
How Do You Apply for a USDA Renovation Loan?
If you want to buy and remodel a home with a USDA loan, follow these steps:
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Find a property. Work with a real estate agent to locate a fixer upper in an eligible rural area.
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Get pre-qualified. Talk to a USDA-approved lender to get pre-qualified. This estimates your borrowing ability.
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Make an offer. Submit an offer and negotiate the purchase price with the seller.
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Apply for pre-approval. Provide documents so the lender can verify your finances and formally approve the loan.
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Complete inspections. The lender will arrange for home inspections to assess renovation needs.
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Close on the loan. At closing, you’ll finalize paperwork and financing. A portion of funds will be held in escrow for repairs.
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Make renovations. Work with a contractor to complete all needed updates within 180 days.
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Release escrow funds. As work is finished, the lender will release escrow money to pay the contractor.
It’s best to talk to a lender early about qualification to ensure a smooth process.
What Loans Can You Combine With a USDA Loan?
You may be able to pair a USDA fixer upper loan with other programs:
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Down payment assistance loans – If you want to put money down to lower your mortgage, you can supplement a USDA loan with down payment help. Local and state programs may offer this aid.
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Energy efficiency loans – Loans specifically for green upgrades may be available. Ask potential lenders.
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Personal loans – You can use a personal installment loan for cosmetic upgrades like painting or carpeting that are not covered by the USDA loan.
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Seller financing – Some sellers offer financing to cover a portion of the home purchase to make deals work. This can complement a USDA loan.
Talk to your lender to learn about options to pair with a USDA fixer upper loan. Multiple loans can maximize affordability.
Tips for Choosing the Right Fixer Upper Property
Not all fixer uppers are created equal. Follow these tips when evaluating potential properties for a USDA rehab loan:
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Prioritize necessary repairs – Focus on homes needing functional or safety upgrades like plumbing, electric, or roofing. Cosmetic updates can come later.
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Estimate costs – Get quotes from contractors to estimate how much repairs will run. Compare to the rehab loan limit.
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Consider resale value – While you may want certain luxury finishes, will they actually impact resale value? Stick to cost-effective upgrades.
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Assess structural soundness – Make sure to inspect the foundation, framing, and other structural elements for problems before buying a fixer. These issues can bust renovation budgets.
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Check for permits – Ask if all previous renovations were completed legally with permits. Undoing unpermitted work gets expensive.
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Leave a buffer – Pad your repair budget by 10-20% for unexpected issues that can pop up in any remodel.
With the right property and preparation, a USDA loan can turn a fixer upper into your dream home!
FAQs About USDA Fixer Upper Loans
Here are answers to some frequently asked questions about using USDA loans for renovations:
Do I need a down payment for a USDA fixer upper loan?
No, USDA loans require zero down payment in most cases. You can likely qualify for 100% financing to cover the purchase and renovations.
What credit score is needed for a USDA rehab loan?
You’ll need a minimum credit score of 640 to qualify. The better your credit, the more likely you are to
USDA Loan Minimum Property Requirements
USDA loans can only be used when the home is the borrower’s primary residence. You can’t use the USDA loan program to buy a vacation house, second home, or rental/investment property.
Beyond being your primary residence, the house also needs to meet these USDA loan property requirements:
- They must be accessible: You must be able to access the property from a road, street, driveway, or another route. There should be no hazards blocking access to the home.
- They must have functional heating, cooling, and electric systems: All systems must be installed, operational and support all home functions including major appliances. No exposed wiring allowed.
- They need to be structurally sound: The home’s foundation must be free of major cracks or moisture issues. There must also be enough life expectancy in the foundation to last the life of your loan— if not longer.
- They must have adequate roofing: The home’s roof must have at least two years of life left. There can be no apparent holes, leaks or missing shingles allowing moisture into the dwelling.
- They must have access to adequate water supply and plumbing: Plumbing, water, and waste removal systems must be functional.
- They need functional doors and windows: All exterior and interior doors must be installed and be working. All windows must be in good condition and free of cracks, leaks or visible mold.
Income-producing properties are ineligible for the USDA home loan. If your property contains a barn, livestock facility, silo, or greenhouse that is no longer in commercial use, there’s a chance it may qualify. Discuss the situation with a USDA lender first to be sure.
What types of properties are eligible for USDA loans?
USDA property requirements may not allow for investment properties or second homes, but there is flexibility in the type of residence you can buy. These mortgages can be used to finance new construction, manufactured homes, modular homes, condos, townhomes, and other alternative properties. Foreclosed homes and short sales are also eligible.