Ask The Experts: Question of the Week
USDA – Financing Repairs
Our loan scenario desk experts receive thousands of questions from our subscribers.
Our experts work in the field and have over 25 years of experience, which is why they help save many deals.
We hope you learn something new!
Question:
Can you tie in money for repairs to a USDA guaranteed home loan?
Answer:
Yes, USDA guidelines allow borrowers to include funds for property repairs in a USDA-guaranteed home loan, provided the total loan amount (acquisition cost + repairs) does not exceed the property’s “as-improved” market value.
Repair Escrow (Minor Repairs)
* Eligibility: Allowed for new or existing properties. Repairs must be minor and not affect the livability or safety of the home (e.g., weather-related delays, minor cosmetic work).
* Maximum Repair Amount: Up to 10% of the final loan amount.
* Escrow Requirement: The lender must escrow at least 100% of the estimated repair cost (often 150% per lender overlays, though USDA requires 100%).
* Completion Timeframe: Repairs must be completed within 180 days of closing.
* Habitability: The property must be habitable at closing.
* Contractor vs. Borrower: Borrowers may complete their own repairs if the estimated cost is $10,000 or less and the lender determines they have the skills to do so. Otherwise, a contractor is required.
Rehabilitation and Repair (Purchase with Rehab)
* Eligibility: Used for existing dwellings that need more significant repairs to meet USDA standards.
* Loan Amount: The maximum loan amount is the cost of acquisition plus the cost of repairs, up to the “as-improved” market value.
* Non-Structural Repairs (up to $75,000):
* No minimum repair amount.
* Home must be considered habitable within 30 days of closing.
* PITI reserves are not eligible.
* An inspector/consultant is not required.
Structural Repairs or Repairs > $75,000:
* Used for extensive rehabilitation or structural work.
* If the home is not habitable at closing, PITI reserves (principal, interest, taxes, insurance) can be financed for up to 10 months or until the home is habitable.
* Requires a qualified inspector or consultant to oversee the project.
Eligible Costs: Funds can be used for removing health/safety hazards, accessibility improvements, septic/well repairs, structural alterations, additions (garage, etc.), modernizations (kitchens/baths), and energy conservation features.
Ineligible Costs: Luxury items (pools, hot tubs), income-producing features, or repairs to condominiums are prohibited.
Contingency Reserves: A contingency reserve of 10% (utilities on) or 15% (utilities off) is required.
General Requirements:
* Appraisal: The appraisal must support the “as-improved” value, assuming all repairs are completed.
* Contract: A fixed-price construction contract is required.
* Lender Responsibility: The lender manages the draw and disbursement process.
Subscribers can access our AI or our Renovation Home Loan – All Agency Comparison Chart under “Guideline References” in “Charts & Checklists”.
Submit Your Loan Scenario Question at www.mortgageguidelines.com