The USDA provides 100% financing for borrowers in a rural area that meet certain income restrictions. What happens, though, when the appraiser says the home does not meet the USDA guidelines? Normally, you’d be out of luck – no bank would write the loan. Luckily, there is the USDA Escrow Holdback Program, though. With this program, you can buy your home and pay for the repairs all with one loan.
What is the USDA Escrow Holdback Rehab Program?
With the USDA Escrow Holdback Rehab Program, you finance the cost of your home and the cost of the repairs in one loan. You can still borrow 100% of the purchase price. You can add onto it, though, with 2% of the home’s value for repairs. If you bid lower than the home’s value for the purchase, then you have more room for repairs. The USDA allows a total LTV of 102%.
The USDA bases the LTV on the ‘as improved’ value. In other words, the appraiser gives the lender a value for the home with the required repairs completed. The USDA then bases your loan amount on that value.
How Does the Escrow Holdback Work?
You will still purchase the home with the USDA loan as normal. The appraiser will notate the items that require repairs. As long as there is no danger for those living there, you can move into the home immediately after the closing.
As a part of the loan process, the lender will require an amended loan application that shows the amount of the repairs. They will also require estimates and a contract from the contractor that will complete the repairs. The repairs should be done within 30 days after closing.
How do you Qualify for the USDA Escrow Holdback Program?
You don’t have to apply for the USDA Escrow Holdback program at the onset of the process. Instead, you’ll get a preapproval for a USDA loan as you normally would. Once you know what you can afford, you can start shopping for a home. You’ll even sign a purchase contract and move forward with the financing.
It’s not until the appraisal report comes back that you’ll realize that you need the Escrow Holdback program. If the appraiser finds that the home does not meet the exact requirements of the USDA, it will show in the report. The USDA will not guarantee the loan and the loan will not close.
If you opt for the Holdback program, however, you can move forward with the process. In order to qualify, you’ll need to meet the USDA’s basic guidelines:
- 640 minimum credit score
- 29% max front-end debt ratio (principal, interest, taxes, insurance, and mortgage insurance)
- 41% max back-end ratio (total debts)
- Purchase a home in a rural area
- Make no more than 115% of the median income for your area
If you qualify for the USDA loan, you’ll qualify for the Holdback program. It’s just incentive the USDA provides to help borrowers continue with their home purchase.
The USDA loan helps borrowers buy a home in a rural area with no money down. It’s a great program for those that would otherwise not qualify for any other program. You don’t have to let a few appraisal issues interfere with your home purchase. Even if the seller won’t touch the repairs, you can pay for them from the proceeds of your loan. Your lender will handle disbursing the funds and approving the repairs. All you have to do is qualify for the loan.
Talk to a few USDA lenders to find the best deal for you. USDA loans usually have low interest rates and closing costs, but shopping around can help you find the best deal.