One of my investors allows home buyers the ability to use the USDA Rural Loan program to complete appraisal mandated repairs after settlement through a Repair/Renovation Budget. If the house you are purchasing is in disrepair, and the seller can’t or won’t make repairs to the property, as is often the case with foreclosure and short sale transactions, this program can be highly beneficial to both the home buyer and the seller.
In order for a house to qualify for a USDA Repair/Renovation Budget the following requirements must be met:
- Repairs must be mandated by the Appraiser in the appraisal inspection report
- Repair costs can’t exceed the lesser of 10% of the purchase price or $20,000
- Work must be completed within 30 days of settlement by a Third-Party Contractor
- The Repair/Renovation Budget can’t be used for any of the following:
- Roof, Structural Repairs or Foundation work
- Items that affect the safety/livability of the home (i.e., lack of gas, electricity, or plumbing, HVAC or foundation defects)
- Require an electrician or plumber
- The Repair/Renovation Budget must contain a 50% reserve account to fund cost overruns. This 50% reserve account is added to the overall renovation budget. Upon completion of the project, assuming there aren’t any cost over-runs, these funds will be used to reduce the outstanding principal balance of the new loan.
Funding the Repair/Renovation Budget can come from the following sources:
- Equity in the property, provided the combined purchase price and Repair/Renovation Budget (excluding the reserve account) are less than the appraised property value
- Seller contribution, provided that the combined seller contribution toward the buyer’s closings costs and renovation budget are less than 6% of the purchase price
- Borrower owns funds, which can include family member gifts
- Combination of any of the above
Upon completion of the repairs, the home buyer notifies the lender, and the lender will order a final appraisal inspection to ensure that the work has been completed. In addition, the home buyer will certify their agreement that the work has been satisfactorily completed. At that point the lender will notify the settlement office, which is holding the Repair/Renovation funds, instructing them to release the Repair/Renovation funds to the contractor.
If actual repair costs are less than the amount in the Repair/Renovation Budget, the balance of the funds will be applied as a principal loan reduction. If the escrow is inadequate, or if additional items of repair are discovered at some subsequent date, it is the home buyer’s responsibility to pay the additional costs.
To learn more about the Virginia USDA Guaranteed Loan program please call (866) 747-2882.