You can secure a 100% loan for a rural property with USDA financing. Are there property restrictions, though? You know you have to buy a modest house. This means one without luxurious accommodations. But, what about a flipped house? Does the USDA allow it? We take a look below.
What is a Flipped House?
When someone buys a home for a low price, fixes it up, and sells it again within 90 days, it is a flipped house. Basically, the owner made a significant profit in a short amount of time. It is a common practice for investors. This is how they make their money in real estate. But, how does it relate to USDA financing? The USDA has many restrictions, but do they allow house flipping?
Why Would the USDA Care?
You might wonder why the USDA would care about a flipped house. It all comes down to the value. In reality, the USDA does not care one way or the other. Certain loan programs strictly prohibit the purchase of a flipped home. The USDA is not one of them. But, what they do care about is the value of the home.
Sometimes flipped homes have inflated values. The USDA makes sure this is not the case by carefully evaluating the appraisal. They look for any new work that was completed within the last 3 months. They then make sure the value of that work is reflected appropriately in the value. In some cases, appraisers inflate the value of certain renovations. If the appraisal seems legitimate, the home should pass for USDA financing.
What are the USDA Guidelines?
Aside from the stricter requirements on the appraisal, the USDA guidelines work the same as they would for any other home. First, you must be eligible for the program. This does not mean qualify for it. You are eligible if you:
- Your total household income is less than the average income for your area
- The home is located in a rural area
Your total household income differs for this program. The USDA looks at every adult in the home. Anyone that makes money must include their income in the calculation. The USDA totals this income and then subtracts any allowances you may be eligible to receive. They include:
- $480 for any child either under 18 or over 18 and a full-time student
- $480 for any disabled person
- $400 for any elderly person over the age of 62
If your total household income after allowances meet the USDA guidelines, you can then see if you qualify for the loan.
Qualifying for the USDA Loan
Qualifying for a USDA loan works just like any other loan. You must have the credit score and debt ratio requirements.
- Minimum credit score of 640
- Maximum front-end debt ratio of 29%
- Maximum back-end ratio of 41%
If you meet these guidelines and have consistent employment, you have a good chance at USDA approval. The hardest part of the process is the appraisal. This is a very important role when you buy a flipped home. Talk to the real estate professional selling home and ask what work has been done. You can then find out from your own real estate professional if the work is worth the value the seller gives it. You might be surprised to learn how little value certain renovations give a home. This is the largest concern with any program and a recently flipped home.
If you want to buy a flipped home, we recommend getting professional assistance for the process. The last thing you want is to sign a contract on a home that you cannot close on. The USDA has the final say in the approval of your loan. They will go over the appraisal with a fine toothed comb. Make sure you work with an honest seller and a qualified real estate professional to make the process work.