Rural homeowners have the benefit of USDA financing at their disposal. This 100% financing program has flexible underwriting guidelines and even allows you to secure money to renovate your home based on the ‘after repair value’ of the home.
If you make less than 115% of the average income for your area, you may qualify for this financing method as long as you have a 620 credit score. You must also be able to prove that you cannot secure financing from any other program.
Assuming you meet these simple guidelines, you can pay for your home’s renovation with the proceeds from your USDA loan.
You Must Live in the Home
In order to use the USDA renovation loan program, you must be able to live in the home after closing on the loan. In other words, the renovations must be minor enough that it’s safe for you and your family to live in the home while the work is completed. Generally, contractors have 180 days to complete the work according to the USDA contract. The only exception to the rule is any exterior repairs that the weather prohibits the contractors from completing.
The Value of the Renovations
You are able to borrow up to 10% of the final loan amount for renovations. If you borrow $150,000 to purchase/refinance your home, you can borrow up to an additional $15,000 for renovations. This includes all repairs on both the interior and exterior of the home.
The Exterior Escrow
The lender can set up an exterior escrow account to pay for the renovations to the exterior of your home as long as you meet the following requirements:
- The renovations must not exceed 10% of the final loan amount
- You must be able to live in the home
- You must have an executed contract with the contractor
- You must have enough funds to cover the costs stated in the contract
- The contractor can complete the work in 180 days or less unless an extension was granted
Once the work is complete, the appraiser must certify that the work is done by doing a formal inspection. The appraiser must provide photographs and a written statement confirming the work is complete.
The Interior Escrow
The lender may also set up an interior escrow account to pay for interior renovations. The maximum amount the lender can set aside depends if you have an exterior escrow as well. If there is no exterior escrow, you can set aside as much as 10% of the final loan amount for interior renovations. If you have exterior work being done, the combination of the interior and exterior renovations cannot exceed 10% of the loan amount.
You must also meet all of the same requirements as when you set up the exterior escrow account. You must have a licensed contractor do the work and there must be a legal contract executed between the two parties. The lender must oversee the work and receive formal word that the work is complete and adequate from the appraiser.
Doing the Work Yourself
It may be possible to do the work yourself assuming you have the experience and the time to do it. If so, you’ll need to meet the following requirements:
- The work cannot cost more than 10% of the final loan amount
- You do not need more than $10,000 to complete the work
- You can prove you can do the work in 180 days or less and have the know-how to do it
The lender will still oversee the work and approve the final payment after the appraiser inspects the work and approves its completion.
If you live in a rural area and have home renovations to make, the USDA loan can provide a great opportunity to do the work with very little cash out of your own pocket.