- 16 Jan, 2024
A Comprehensive Look at USDA Renovation Loan Options
A guide to minimizing closing cost on a USDA loan
You can’t stop thinking about that serene rural property you’ve been eyeing? The USDA renovation loan can be the perfect loan option for you.
In today’s blog, you will understand the types of renovation loans USDA offers along with the tips to manage those expensive closing costs. Come, let’s talk about renovations!
What is a USDA renovation loan?
They cover the entire cost of both the purchase and renovation of your home, backed by the U.S. Department of Agriculture. Plus, there is no down payment required. Cool, right?
All the eligible borrowers who meet the USDA requirements, qualify to purchase a fixer-upper home. This particularly helps all the homebuyers who are looking for affordable properties in the competitive U.S. housing market.
2 types of USDA renovation loans
They are also known as the Single Family Housing Repair Loans & Grants program. Instead of making offers on newly built homes, homebuyers who look for fixer-upper homes have a slight edge over other homebuyers because they have less competition and get an opportunity to quote lower prices.
But before jumping into the details, let us first look at the two available options for USDA home renovation loans.
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Limited renovation loans
This type is designed for homeowners seeking to make relatively less extensive repairs and improvements to their property.
What makes this loan stand out is its flexibility and efficiency. There's no need to meet a minimum repair cost, making it accessible for a range of projects. It allows you to access funds swiftly for all your limited renovation needs.
The maximum repair amount is set at $35,000. Whether it's minor updates or essential repairs, a limited home renovation loan helps homeowners finance their renovation journey without the burden of hefty expenses.
Here’s a list of repairs & upgrades you can consider with limited renovation loans:
➙ Flooring
➙ Existing HVAC systems
➙ Electrical & plumbing systems
➙ Roof & drain systems
➙ Minor remodeling without structural repairs
➙ Painting (Interior & Exterior)
➙ Installation of storm doors & weather stripping
Now, if you’re wondering – How do I find the funds to restructure the property?
You might have to explore the other type, explained below.
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Full renovation loans
They offer comprehensive financing solutions for homeowners who are looking to undertake a wide range of renovation projects.
Unlike the limited option, the full home renovation loan doesn't impose any minimum or maximum limits on the renovation amount. However, it's important to note that your overall qualifying loan amount is subject to conforming loan limits set by theFederal Housing Finance Agency (FHFA).
Here, your entire property is inspected by a HUD consultant to check on the repairs and their associated costs. This person is in charge of the project and starts by providing you with a work write-up.
All the repairs mentioned in the limited option can also be done with the full renovation loan.
Additional repairs include:
➙ Reconstruction
➙ Structural alterations
➙ Modernization of bathrooms and kitchens (including new appliances)
➙ Installation of wells or septic systems
➙ Removal of health and safety hazards
➙ Rehabilitation of garages
➙ Improvements in handicapped accessibility
➙ Aesthetic appeal changes
It's important to note that while the Full Renovation Loan accommodates a broad range of renovations, certain projects such as major construction or lengthy repairs are ineligible under this loan program.
If you need a renovation loan that is both extensive and flexible, the second loan option can be used as a powerful tool to fund your diverse renovation needs.
With that, let’s understand how you can qualify for a USDA home renovation loan.
How to qualify for a USDA renovation loan?
How can you finance your home purchase and renovations all in one go?
By meeting these qualifications for a USDA rehab loan👇
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Your home must be located in a USDA-eligible area.
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You are a U.S. citizen.
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You need to be a primary resident homeowner.
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You need to meet the income limits for the area in which you’re planning to buy.
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Your credit score needs to be equal to 620 or more.
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You need to maintain the DTI ratio determined by USDA’s guaranteed automated underwriting.
Apart from these requirements, you should know that renovation loans by USDA require an appraisal. This will be ordered by your lender once you go under contract on a home.
The contractor you find will then provide a formal bid which is an estimate including the scope of work and associated costs. This estimate must be provided to your lender for approval.
Till now, we have been looking at the purpose and requirements of a renovation loan from USDA. But, what’s in it for you? How can you benefit from it? You will see it next!
Top 10 Benefits of USDA renovation loan
The USDA home renovation loan program offers several advantages for homebuyers and homeowners looking to enhance their properties:
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100% financing
It is ideal for both first-time and repeat homebuyers. This program allows you to finance both renovations as well as the purchase of your new home.
🏠Renovate your fixer-upper with Home Loan Rate of Interest, in just 4 easy steps and get a personalized quote to suit your needs.
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Low interest rates
As the loan is backed by the U.S. Department of Agriculture, homebuyers enjoy the benefit of low-interest rates, making their home financing more affordable.
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No reserve requirements
Unlike some loan programs, the renovation loan offered by USDA doesn't necessitate reserve requirements, providing more flexibility in your financial planning.
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No maximum loan amount
There's no cap on the loan amount you are required to borrow, however you need to meet the conforming limits.
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Accepts income from self-employment
If you're self-employed, the renovation loan program from USDA considers your income, expanding eligibility for small businesses to afford a home.
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No mortgage insurance
You can save on additional costs such as this program doesn't require you to purchase mortgage insurance.
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Fixed-rate mortgage
You can enjoy the stability of a fixed-rate mortgage, ensuring predictable monthly payments and organizing other committed payments efficiently.
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Ability to finance repairs
One of the highlights of the renovation loan USDA, is the option to finance not just the home purchase but also the necessary repairs or improvements based on the type of loan you choose.
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Financing for low-income individuals
These loans are tailored to support low-income individuals, opening doors to homeownership with favorable terms. It is also ideal for homebuyers who don’t have enough funds to pay upfront costs such as down payment.
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Grants for individuals aged 62 and above
USDA home improvement loans are especially beneficial for seniors, as the program offers grants for those aged 62 and above, easing the financial burden of renovations.
If you’re a homebuyer who is looking to purchase a primary residence with a comprehensive package of financial benefits, a renovation loan by USDA is one of the best options available to you.
But if you’re considering a USDA purchase loan, make sure to check out the comparison below.
USDA renovation loan vs USDA purchase loan
It’s always good to have options! If Plan A fails, you can always make Plan B work. So, let’s get to the point straight.
| Renovation loan | Purchase loan |
|---|---|
| 1) If you’re considering a fixer-upper, and you’re prepared to face the challenges of renovating one, a USDA rehab loan could be your best choice. | 1) The process here is not too complicated, and there’s no need to book a contractor or submit a bid to your lender to close the loan. |
| 2) Renovations can give a new look and feel to your home, but not as easy as it sounds, especially if you need to live while the renovation is taking place. | 2) In simple terms, they only help by providing the funds to purchase a new home. |
| 3) Due to certain issues, if the contractor steps back, you will have to start the process all over again by finding a new contractor and covering those expenses by yourself. | 3) You can’t do any renovations, but once you’ve built equity in your home, you can then use it to finance the repairs and upgrades by getting a HELOC, home equity loan or cash-out refinance. |
The choice is yours, and knowing all the details is crucial, especially when buying a property in a rural area.
In the decision between a USDA purchase loan and a renovation loan, your choice must be based on your specific needs, location preferences, and the scale of your renovation project.
Consider the flexibility of combining purchase and renovation costs with the renovation loan vs the broader property choices offered by a USDA purchase loan.
Evaluate your priorities, financial capacity, and long-term goals to make an informed decision that aligns perfectly with your homeownership or renovation journey.
The blog isn’t done yet. Before saying goodbye, we would like to offer some practical tips to save and minimize the closing cost on a USDA loan. We will be done in another minute.
Tips to lower closing cost on a USDA loan
The USDA loan closing costs are not always welcomed by borrowers. Why? They add up to the total cost of the loan. So, here are a few ways you can save your purses and wallets from paying the USDA closing costs.
Check for discounts and utilize them effectively. Look for mortgage lenders who offer discounts.
If you’re a first-time homebuyer, don’t miss out on down payment assistance programs.
After a home inspection, if there are repairs, promise to handle it yourself so that you can ask for a repair credit from your lender.
Negotiate with your seller, and ask them about the costs they’re willing to pay. Approach your lender and check for seller concessions, before you reach out to your seller.
Gift funds are offered by USDA loans. If you’re unable to pay the closing cost on a USDA loan out of your pocket, you are always free to use the USDA gift funds.
Closing fees may apply, and they can’t be avoided completely. But, with the right strategy and support from your seller, we are sure you can minimize the closing cost on a USDA loan without any hurdle.
Is the USDA renovation loan the right choice?
As you have grabbed all the essential information about the USDA home improvement loan options, you might have one final question – Is it the right choice for me?
As you know, there’s no single answer to this question. It depends entirely on your personal situation. If you’re completely drawn into the concept of rural living, then you can give it a go. But, don’t make the decision just like that.
It's essential to weigh the factors carefully. Consider the location restrictions, documentation requirements, and the overall scope of your renovation project.
On the flip side, if your heart is set on a property outside rural areas or if your renovation needs are not urgent, a traditionalUSDA loan might be a better fit.
Take your time, and decide!
