You found the perfect fixer-upper, but you need USDA financing because of your low income and no money for a down payment. The USDA usually requires homes to pass their appraisal, which includes their minimum property requirements.
Can you buy a fixer-upper with your USDA loan? You might be able to, but you must meet certain requirements.
The Home Must be Livable
One of the USDA’s largest rules is that you must be able to live in the home while it’s being renovated. If the home is beyond inhabitable, you won’t be able to use USDA financing on it. While you live in the home, the work must be completed within six months. If the work will take more than six months, you can’t use USDA financing.
What constitutes a livable home will vary by lender. Obviously, you need to be able to live in the home without fear of any dangers or obstacles making your daily life difficult. There cannot be the presence of things like lead paint or asbestos, as they don’t make for a livable home.
The Home can Only Need Minor Renovations
If the home needs a major overhaul, you can count USDA financing out of the running. The home can only need minor renovations that cost no more than 10% of the loan amount. On a 150,000 loan, the renovations cannot cost more than $15,000.
While this does limit the work you can do on a home, it still leaves you plenty of room for renovation. While knocking down walls or adding rooms might not be feasible, you may be able to do things like replace a deck, paint the exterior of the house, or put on a new roof, just as a few examples.
You Don’t Handle the Payments
Your lender will handle the payments to the licensed contractors working on your home. The contractors will have a contract that the lender will approve that will include a distribution of funds schedule. The contractor must then meet the dates on the contract in order to receive the funds.
The lender will do a final inspection to ensure that the contractor did everything according to the agreement before they will release the final payment. You must also sign off on the work saying that it is satisfactory according to the agreement as well.
You May Need a Contingency Fund
Some lenders require you to have a contingency fund to make sure you have money should an emergency arise. It’s impossible for contractors to figure out everything that could go on when they renovate your home. If something comes up that will cost a lot of money to fix, you’ll need the contingency fund to rely on if you don’t have enough in the money borrowed for the home.
Contractors Do the Work Most of the Time
A majority of the time, contractors are necessary to do the work on your home. If you are capable, though, you may be able to do the work yourself, but your lender must approve you to do so. In order to qualify, you must be able to prove not only that you have the knowledge to do the work, but also that you have the time to get it done within six months. The work that you do also cannot exceed 10% of the loan amount, just as is the case if a contractor does the work.
The bottom line is that you can buy a fixer-upper with USDA financing, but it must be a minor fixer-upper. You can’t buy a home that is completely unlivable that needs thousands upon thousands of dollars of work. If you find a home that’s doable, but needs a facelift, though, it could be a good candidate for USDA financing.