Falling in love with a home in a rural area that doesn’t meet the USDA requirements can leave you without a home to buy. The USDA has strict appraisal requirements that help ensure the safety and stability of a home. If it doesn’t meet the requirements, you still have an option; it’s called the Mortgage Repair Escrow Program.
The USDA Repair Escrow Program
When a home doesn’t meet the appraisal requirements, the lender has a couple of options.
- Deny you the home loan
- Offer the USDA Repair Escrow Program
The USDA repair program allows borrowers to borrow as much as 10% of the loan amount for required repairs. The key thing here, however, is the home must be livable. If the appraiser deems it unsafe to live in, this program will not apply. If it is safe to live in, though, you may qualify.
Setting up the Escrow
The USDA approved lender will require you to get estimates to determine the true cost of the repairs. They will then need to fund your escrow account with at least 100% of this amount. Many lenders require a contingency fund just in case there is an emergency and more funds are required.
The contractor you secure to do the work must be able to start within 30 days of your closing date and complete the work within 180 days from the closing. A majority of the time, a professional contractor is required to do the work. The only exceptions are if all of the following are met:
- The proposed cost of the work is less than 10% of the loan amount
- The amount you must hold in escrow is less than $10,000
- You can prove to the lender that you have the capability and knowledge to complete the work
If these don’t apply or you don’t want to do the work, you and the lender will work together to find a suitable contractor that meet’s the lender’s approval.
A majority of repairs must be completed within 180 days of the closing. The exception to this rule, however, is for any exterior repairs. If the weather doesn’t cooperate, making the repairs impossible, you may apply for an exception. The USDA may grant an exception for another 60 days for a maximum of 240 days after closing. This only pertains to exterior repairs.
The lender has the final say regarding when escrowed funds may be released. This usually means upon final inspection or the licensed appraiser. In his inspection, the appraiser must state:
- All repairs were completed and meet the standards stated within the initial contract
- Provide photos of the repairs
The appraiser must then sign the report. Once the lender is satisfied with the inspection, they can release the funds.
Dealing With Excess Funds
If after the repairs are complete there are funds left in the escrow holdback, the lender will use the funds to pay down the principal balance of your loan. You cannot receive any cash in hand after the repairs are complete. The only money you may receive back is money you put into the escrow account (if any).
The USDA Mortgage Repair Escrow Program helps encourage the purchase of rural homes, even those that need a little TLC. It makes getting the repairs affordable and feasible for low to middle-income families.