USDA Property Condition Requirements
If you want to buy a home but do not have the money for a down payment, the USDA loan program might be the answer.
If you are planning to buy a home in a rural area, you could qualify for the USDA program. Your household income should not exceed 115% of the median in the area for you to be eligible, and there are restrictions on the home that can be purchased with this loan.
But before you apply for this type of loan, you need to understand the property requirements you will need to meet to qualify. These USDA minimum property requirements ensure the home is structurally safe, in good repair, and functionally sound.
These conditions might appear to be overly strict, but they do protect the buyer, as well as ensure the USDA is not guaranteeing a loan that is too big a risk.
The first thing you need to check is whether the home is located in an eligible area:
Property Location Rules
A USDA loan can only be used to buy a home that will be a primary residence located within an area designated as rural by them. Normally, rural areas are considered to be the open country that is not part of an urban area. This could mean any town or even city when it is not associated with an urban area.
The neighborhood could even be next to a densely populated area, as long as it is rural in character and the population is less than 10,000. Even areas that share a border can be considered separately for rural classification when their main settled areas are not directly next to each other.
Other USDA characteristics of a rural area include:
- It cannot be in a location classified as a metropolitan statistical area (MSA) but can have a population between 10,000 and 20,000.
- An area classified previously as “rural” before October 1, 1990, that has since been determined not to be rural from census data.
- Anywhere classified as a “rural area” between January 1, 2000, and December 31, 2010, with a population between 10,000 and 35,000 in the 2020 census.
All of these areas also have to have a serious lack of mortgage credit provision for moderate and lower-income families.
Areas that are eligible for USDA loans can change annually. Changing population sizes and other factors affect the eligibility of an area.
The guidelines from the USDA do allow for areas you might not expect to fall within their requirements. Though, to be sure whether the area you are looking to buy a home in is eligible, you can check the exact address or general area on the USDA website.
The home you want to buy must meet certain standards. The USDA has these standards to ensure the borrower is protected, and, should the home foreclose, their interests as well.
Homes that qualify for the USDA program need to be what they consider modest. This means that they should not have a market value above the area loan limit, which is usually 80% of the local HUD 203(b) limit.
The size of the home has to generally be between 400 and 2000 square feet. Homes with smaller square footage, or tiny homes, can be approved if they meet the other standards, however.
Homes larger than 2,000 square feet can also be approved if they are:
- Modest for the area
- The borrower has a special need for extra space
- Ownership costs are not going to be excessive
The home also needs to have been designed for permanent living, with at least a bedroom, kitchen, dining room, and bathroom. Though it cannot have an in-ground swimming pool, even if this is planned to be removed.
Properties cannot include buildings or land used primarily to generate income. This means farm buildings like barns, commercial greenhouses, and silos unless they are no longer used for their original purpose. However, this does not restrict home-based businesses as long as they do not use commercial buildings.
Properties cannot be purchased as a rental or investment. It must be owner-occupied.
If the home has solar panels that generate an income, this generally is not an issue. Though if the panels are part of a lease agreement, instead of being included with the home, there are additional conditions.
The home must comply with zoning rules and restrictions. If the property does not comply with current zoning rules but has been accepted by the local authority under previous rules, it will be considered legal non-conforming.
USDA Property Standards
Any home that is to be financed using a USDA loan, needs to meet their quality assurance guidelines. An appraisal is used to provide evidence that the USDA standards have been met.
Appraisals are different for USDA loans compared to appraisals for other types of lending. Along with finding the market value of the home, the appraiser also needs to check that the home conforms to the USDA’s standards.
A qualified independent appraiser will be hired to assess the home using comparable properties to find the fair market value. They also take photographs to show the condition and quality of the place.
The appraiser’s job is to ensure that the USDA standards are met. The appraiser will use the guidelines in the HUD’s Single Family Housing Policy Handbook to ensure the home meets the standards. These standards mean the appraiser will check the following:
- The foundation and the structure of the home should be serviceable for the lifetime of the mortgage. If there are any major cracks or moisture visible, this will be reported and may require further inspection.
- The basement will be checked for any indication of dampness, and signs of structural issues that could affect the health and safety of the homeowner.
- If the basement has a sump pump, the appraiser will check to ensure it is functioning.
- The crawl space in the home must be visually observed by the appraiser. This will ensure there is enough space between the floor joists and the grade, with sufficient space to allow access to maintain plumbing and ductwork. There should be enough ventilation and not excessive amounts of dampness and water pooling. The space should be free of debris, trash, and vermin.
- The roof should prevent moisture from entering the home and should continue to do so for at least 5 years. If this is in doubt, a professional roofer may be called to inspect the roof.
- The attic space will be checked for signs of roofing leaks, lack of ventilation, and mold. If any of these issues are apparent, they will be reported, possibly requiring further inspection and repairs.
- The appraiser will check the physical health of plumbing, heating, and electrical systems, checking how well they function. For example, there should be enough water pressure for waste removal, and the electrical system should be up to date without exposed wiring. If the home is vacant and these systems are turned off, they will ask for them to be turned on, but if that is not possible, it will be noted in their report.
- The exterior of the home will be looked at for signs of defective paint. They will ensure there is not any rotting wood or other structural issues.
- If the home was built before 1978, repairs might have to be made if there is damage to paint surfaces inside and outside the home. This will ensure the risk from lead paint is removed.
- There has to be access to the home from a road with an all-weather surface. If this is a private road, it needs to have a legally enforceable arrangement to ensure it is maintained.
- The needs to be water and wastewater disposal systems that meet Rural Housing and Community Development Service policies. These services must be provided continuously and at reasonable rates.
- Windows and doors should be in good condition and working. Exterior doors should have functional locks. Windows should not have cracks, and there should not be signs of mold.
- The flooring in the home needs to be in a reasonable condition. The appraiser should not be able to observe any hazards or other issues.
- Staircases have to be in good condition with a solid handrail. There should not be any obvious indication that the stairs will present a hazard to the homeowner.
- If the home has garages, porches, or decking, these should be in good condition and safe for occupants to use.
If these minimum property requirements (MPR) are not met, repairs will be needed before the USDA home loan will be approved.
Normally, the seller will have to pay for the repairs, though if they do not agree to this, the buyer has to make a choice. They can walk away, with their earnest money returned if covered by a contingency or pay for the repairs themselves. If the buyer does choose to pay for repairs, the loan might still not be approved, however.
Types of Homes Accepted by the USDA
The USDA will accept many different types of homes in its loan program as long as they meet their minimum requirements. These include existing homes, new constructions, modular, manufactured, condos, townhouses, and foreclosed homes.
Let’s look at two of these types in more detail:
A home that has been constructed for 12 months or more, is considered an existing dwelling. The USDA does not require a home inspection before the loan is approved, though it is normally advisable. A home inspection is a more detailed examination than an appraisal and offers more peace of mind for the buyer.
An existing home has to be decent, safe, and sanitary (DSS). This means it needs to be in good repair, functionally adequate, and structurally sound. The appraiser or inspector will produce a report to show whether the home meets the DSS requirements concerning:
- Termites and other pests
- Plumbing and sewage
- Heating and cooling
- Electrical systems
- Structural integrity
If the appraisal indicates there could be some issues, additional inspections could be required. If there are signs of termites in the home, the lender could call for a termite inspection before they will approve the loan.
If any problems have been noted within these categories that mean the home does not meet the DSS requirement, they must be fixed before closing. Problems that are not considered critical, can be repaired by the seller either before or after closing.
If you are using a USDA loan to fund new construction, you will need to have a building permit or certification from a qualified organization to show that your plans meet current development standards.
The new home needs to be inspected at least three times during the different phases of construction. These can occur when:
- The foundations are ready to be poured
- When the shell of the home is complete but before the electrical and plumbing systems are covered
- When the home has been completed but before occupancy
A manufactured or prefabricated home only needs the foundation and the final inspections to meet the requirements. The builder has to provide a 1-year warranty acceptable to Rural Development.
If it is not possible to inspect foundations, perhaps because they have already been poured, a final inspection and a 10-year insured warranty from the builder are also acceptable.
There needs to be evidence that the minimum thermal standards have been met. The International Energy Conservation Code standards at the time of construction need to be followed. These standards can be confirmed during the final inspection or through a Certificate of Occupancy. They can also be certified by the builder, an architect, or another qualified person.
Summing Up USDA Property Standards
If you want a home loan guaranteed by the USDA, you might find that more areas are eligible than you imagined. And though there are restrictions on the property that they will finance, this is unlikely to be an issue with most home purchases.
The USDA’s standards could seem like a lot of unnecessary checks. But buying a home is a long-term financial commitment, that you do not want to get wrong. The appraiser’s findings could help you avoid a nasty surprise, giving you the option of walking away from the purchase without hurting your finances.
About the author: This article on “USDA Dwelling Standards” was written by Luke Skar of MadisonMortgageGuys.com. As the Social Media Strategist, his role is to provide original content for all of their social media profiles as well as generate new leads from his website.
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