Typically, buying a home with USDA financing means you buy a home that you can move right into. The home must pass the USDA appraisal guidelines, which state that the home is in safe, stable, and sanitary condition.
What happens if you want to buy a home that needs a little TLC? Can you still use USDA financing?
The answer is that it depends. You have to meet certain criteria in order for the USDA to allow you to borrow funds not only to buy the home, but also to fix it up.
The Home Must be Habitable
First and foremost, you must be able to live in the home right away. If you have to be displaced elsewhere, you can’t use USDA financing. The home must be safe and sanitary in order to live there. In other words, the home can’t pose any type of danger to you or the other occupants of the home.
The Renovation Costs Can’t be More than 10% of the Loan Amount
The renovations that the home needs must not be more than 10% of the final loan amount. This means the renovations can’t be major. We already know that you must live in the home in order to get USDA financing, so the renovations must be cosmetic or minor in nature in order to fall under the financial guidelines of the USDA.
The Money Must be in an Escrow Account
The lender must set up an escrow account to keep the funds meant for the home renovations. The escrow account must have enough money to cover 100% of the costs according to the contractor. In some cases, the USDA requires you to have a contingency fund to account for any unforeseen circumstances.
The money cannot be distributed until a final inspection has been completed and when you sign off on the account stating that it is in good repair and completed as described. The lender is responsible for securing the final inspection and the lender also handles the distribution of the funds.
You May be Able to do the Work Yourself
If you want to do the work yourself, the following must be true:
- The cost to do the work must be less than 10% of the loan amount
- The total amount in the escrow cannot exceed $10,000
- You must prove that you are capable of completing the work
The Work Must be Done in 180 Days
Whether you or a contractor do the work, the work must be done in 180 days. If there any issues with meeting that deadline, you must get in contact with your lender and/or the USDA right away. They do grant exceptions, but you can’t just assume they will give it – you have to apply for it.
While you can get USDA financing to buy a fixer-upper, it must be a home that doesn’t require a ‘ton’ of work. Because the home must pass the USDA appraisal and be able to be lived in, it’s important to know the amount of work that must be done. If it exceeds 10% of the loan amount or won’t allow you to live in the home, you’ll have to find other financing.