How do you finance home repairs with a USDA loan?
Can you finance home repairs with a USDA loan?
What happens if you have found that perfect property, but there are required repairs that need to be completed? What if you could still purchase the home and then have the repairs done after closing? Well this is exactly where a USDA loan can step in.
Before we get started, I just wanted to remind everyone to download our USDA Blueprint for Success with the link below. This is a great educational resource that breaks down the USDA Loan process and is a must have for Realtors and Homebuyers alike.
So, what are the steps to finance home repairs with a USDA loan?
Just to be clear, we are not talking about the FHA 203K program or any type of full blown renovation loan. Instead, through the ability to finance home repairs with a USDA loan, it allows for an escrow repair option which can pinpoint specific repair items and allow them to be financed into a USDA loan.
As a starting point, allowable repair examples may be the replacement of an air conditioning unit, flooring, or other repair that would not affect the livability or safety of the home.
Additionally, here are examples that are not eligible to be financed after closing:
- Roof or Foundation repairs,
- Repairs to the home’s basic structure,
- Electrical System, or
While this is not an inclusive list, please check with my team as early in the process as possible so we can discuss any repair questions and overall eligibility.
Now let’s walk through the required steps:
- Repair Costs are not allowed to exceed 10% of the final loan amount.
- Contractor agreement and invoice required for all repairs
- Repairs ideally to be completed within 30 days
- Repair funds are placed into escrow at closing with the title company or attorney
- The financed amount of repairs may not exceed the appraised value
There will be a required 50% deposit of the total repair cost due at time of closing. This is allotted to cover any potential cost overruns and can be from either the buyer or seller. However, this amount may not be financed.
After successful completion of the required repairs are documented by a final inspection and approved, release of funding from the title company for contractor funds and the 50% deposit occurs.
As you can see, it is possible to finance home repairs with a USDA loan and this can be a great loan option for REOs, Short Sales, & Distressed properties that are in need of manageable repairs to make the home eligible for financing.