USDA Renovation Loan: How to Buy a Fixer-upper With No Down Payment

USDA loans are one of the best deals out there for purchasing a home. No money down, lower mortgage insurance rates than FHA loans, and you can use gift funds to cover your closing costs. Little or no money upfront to buy a home? Yes, please.

But what about if you want to buy a fixer-upper with a USDA loan? Do all those same great benefits apply? You bet.

A USDA renovation loan allows you to finance 100% of the purchase and 100% of your renovation costs, plus repairs up to the “as-improved” market value. That means you can buy and renovate a fixer-upper with no down payment.

So, can you buy a fixer-upper with a USDA loan? Yes. And we’re going to tell you how to do it.

How do USDA renovation loans work?

Before we get into the specifics of how USDA renovation loans work, let’s talk about what they are and why they’re so great for this current market.

What is a USDA renovation loan?

USDA renovation loans are 100% financing loans backed by the U.S. Department of Agriculture. They enable eligible, qualified borrowers to purchase a fixer-upper and fix it up with no money down.

That is one of the best hacks out there for today’s hyper-competitive housing market. Rather than being one of many buyers making offers on new or newly-renovated homes, look for the fixer-uppers no one else wants to buy. You’ll likely have less competition, and chances are you’ll get a lower purchase price, too.

USDA renovation loan property requirements

You can use a USDA renovation loan to buy and renovate a detached, single-family fixer-upper. Although you can use USDA purchase loans to buy a condo or manufactured home, USDA renovation loans may not be used for these property types.

Additionally, USDA home loans may not be used to buy multifamily properties (in contrast with VA, FHA, and conventional loans, which all allow multifamily purchases).

The home must be your primary residence. You cannot use a USDA loan of any kind to buy an investment property.

Finally, you cannot use the loan to add income-producing features. For instance, you can’t renovate a structure on the property to turn it into an AirBnB or establish a commercial farm on the grounds.

A home must also meet two other criteria for a USDA renovation loan:

• Construction on the home must be complete. You cannot use a USDA renovation loan to buy a house that was partially built and then abandoned by the original builder. All construction must have been finished in order for it to qualify
• The home must be at least a year old. Your lender will need to see a certificate of occupancy that was issued at least 12 months prior to when you will purchase the home. That doesn’t mean someone must have lived in it for at least a year. It’s OK if the home was never occupied, as long as it was built at least a year ago. 

How much can you borrow with a USDA renovation loan?

How much you can borrow for renovations depends on your preapproval** amount, the type of USDA renovation loan you’re using, and the home’s as-completed value. We’ll get into the details in just a second, and we’ll dive into the preapproval specifics later.

But for quick reference, your maximum preapproval amount is the total you can borrow for the home and the renovations.

If you’re approved for $300,000, that’s the all-in total you have to work with for both buying and renovating the home. If you’re approved for $250,000, that’s how much you have for a purchase and repairs, as long as the home will be worth at least that much when repairs are complete.

As an example, you’re approved for $250,000 loan. The home is $200,000 and estimated repairs are $50,000. The appraiser will make sure the home will be worth at least $250,000 when repairs are complete. If it will only be worth $240,000, that would mean a maximum loan amount of $240,000.

Types of USDA loans you can use to buy a fixer-upper

There are two types of USDA renovation loans:

• USDA Limited, which allows you to finance up to $35,000 worth of non-structural renovations
• USDA Standard, which allows you to finance more than $35,000 worth of structural and cosmetic renovations

USDA Limited renovation loan

The USDA Limited renovation loan can be used to cover non-structural repairs such as:

• Painting the house
• Remodeling the kitchen
• Upgrading the bathroom
• Putting in new windows
• Replacing flooring
• Minor roof repairs, such as replacing missing or old shingles

You can borrow up to $35,000 to cover repairs with a USDA Limited renovation loan. But that $35,000 includes the repair costs, renovation-related fees, and a mandatory contingency fund (more on that below).

So, if you’re preapproved for $300,000 and you find a home for $265,000, you can use the remaining $35,000 (minus fees and contingency) to renovate upon closing.

USDA Standard renovation loan 

A USDA Standard renovation loan allows you to finance structural repairs, including:

• Adding another bedroom
• Replacing the roof
• Taking down or putting up new walls
• Add ramps or other mobility features
• Weatherize the home or make energy-efficient upgrades
• Install or repair septic systems
• Install or repair wells
• Repair other structures on the property, such as accessible dwelling units (ADUs)
• Repair a swimming pool already on the property

Note that you cannot use a USDA standard renovation loan to add a new swimming pool to the property, nor can you use it for luxury upgrades such as outdoor kitchens.

You can borrow more than $35,000 with the USDA Standard, up to your preapproved loan amount.

So, let’s say you’re preapproved for $250,000 and you find a home for $200,000. You can use the remaining $50,000, minus contingency and fees, toward renovations.

If you use a USDA Standard renovation loan, the USDA requires that an inspector approved by the U.S. Department of Housing and Urban Development (HUD) or another licensed inspector chosen by your lender will need to assess the home and the planned renovations.

USDA homebuyers do not typically need cash reserves to qualify for the loan. But if you are buying a house that is currently not habitable due to the needed repairs, you must have six months of cash reserves. The cash reserve amount includes the principal, interest, taxes, and insurance for each month.

If you do not need to use the cash reserves for the renovations, that money will be applied to your loan principal. If you use some but not all of the reserves, the remaining balance will be applied depending on the loan program.

• Limited Program: Unused contingency can be applied as a principal reduction
• Standard Program: Unused contingency funds can be used for allowable repairs after the final inspection or applied as a principal reduction.

USDA renovation loan contingency fees explained

The contingency fund requirement is there in case the renovation costs run over, as often happens once work begins. If supply costs increase or the contractor finds an issue that needs to be dealt with in order to complete the repairs, the contingency fund serves as your safety net.

The contingency fund requirement depends on whether the utilities are turned on for the home appraisal:

• If the utilities are turned on, the contingency requirement is 10% of your renovation fund
• If the utilities are not turned on, the contingency requirement is 15% of your renovation fund

If you’re using a USDA Limited renovation loan with a $35,000 renovation fund, your contingency would be $3,500 with the utilities on, or $5,250 with the utilities off.

Why do the utilities matter at this point, since you’re not living in the home yet?

“If the utilities are on, the appraiser can kick the tires and see what might go wrong,” says Adam Levitt, the renovation financing business development manager with Fairway.

But when the utilities are turned off, the appraiser has less visibility into the home’s systems and potential issues. That leaves a greater risk that a costly, unanticipated problem will come up during the renovations, hence the higher contingency.

“It’s to help protect the collateral and the borrower,” Levitt says.

Then there are the fees. Levitt says the amount needed for fees varies based on the required permits in your state and city. But he says homebuyers should expect to pay roughly $2,700 in fees.

Here’s what the cost breakdown might look like for a USDA Limited renovation loan for a $300,000 home with a $35,000 renovation fund. This example assumes that the utilities are turned on at the time of the appraisal.

USDA Limited example

Now let’s look at a possible breakdown for a USDA Standard renovation loan in which the borrower was approved for $250,000 and is buying a home for $200,000.

In this example, we’ll assume the utilities are not turned on at the time of the appraisal, so the contingency amount will be 15% of the renovation fund.

USDA Standard example

How do you qualify for a USDA renovation loan?

A USDA fixer-upper loan offers the same core benefit as a USDA purchase loan: 100% financing for a single-family home. But you get the added bonus of financing 100% of your renovation costs as well. In other words, you can buy and renovate with a single loan, all at little or no money down.

Plus, if the home’s value after renovations is more than what you owe on your mortgage, you have instant equity in the property.

The qualifications for USDA renovation loans are similar to those for a USDA purchase loan:

• The home must be in a USDA-eligible rural or suburban area
• You must meet the income limits for the area in which you plan to buy
• Credit score of 620 or higher (though lenders may be able to approve you with a lower score if you are otherwise creditworthy)
• A qualifying debt-to-income ratio* determined by USDA’s Guaranteed Automated Underwriting

As with a USDA purchase loan, USDA renovation loans require an appraisal, which your lender will order after you go under contract on a home. You will also need to find a contractor and receive a formal bid, or an estimate including the scope of work and associated costs, and provide that to your lender.

A quick note on USDA income limits: Lenders look at your household income minus allowed deductions to determine your USDA eligibility. Even if your income appears to be higher than the limits for your area, you may still qualify once deductions are taken.

That’s why it’s always a good idea to talk to a USDA lender rather than guessing at your eligibility on your own. If you’re not USDA eligible, your lender can tell you which other loan programs may work for you.

There are a number of no and low down payment loan options, and your lender can help you find the right one.

Buying a fixer-upper with a USDA loan: How it works

Many of the steps involved in buying a fixer-upper with a USDA renovation loan are similar to those you’d go through with a USDA purchase loan. But there are a few extras, especially once the renovation work begins.

Step 1: Get preapproved

This should be your first step no matter what kind of mortgage you hope to get. Your preapproval letter will tell you how much you can borrow and the types of loans you qualify for. As we mentioned above, your maximum preapproval amount is how much you can borrow total, including the purchase price and renovation costs.

Step 2: Make an offer on a house

Make sure your real estate agent knows that you plan to use a USDA loan to buy your home. That way they can show you homes that are in USDA-eligible areas only. 

Step 3: Find a contractor and schedule the appraisal 

After your offer is accepted, your lender will begin processing your loan and you will need to find a contractor to submit a renovation bid to your lender. You cannot do the renovations yourself with a USDA renovation loan, so start looking for good contractors in your area as soon as you decide to use one of these loans.

During this time, known as your due diligence period, your lender will schedule an appraisal of the home. They schedule the appraisal, and you’ll pay the appraisal fee as part of your closing costs.

The appraiser will determine the “as improved” value of the home, meaning its predicted value once repairs are complete. Lenders cannot approve USDA loans for more than the appraised value of the home, so this is an advantage of the renovation option.

The USDA allows lenders to approve loans based on the as-improved value, giving you more borrowing power. Another bonus is that the USDA allows you to finance your closing costs as part of the home if the appraised value is higher than the purchase price.

If the “as-improved” appraisal comes in higher than what you are paying to buy the home, you can use the difference to finance your closing costs. No down payment and little to no closing costs means you could buy a house with very little money upfront.

Step 4: Submit your contractor’s bid to your lender.

Once you’ve found a qualified contractor and received their estimate, submit their bid to your lender. The lender will verify that the planned renovations are within the scope of your loan program (USDA Limited vs USDA standard) and that the costs align with your approved loan amount.

Step 5: Close on the home

After your lender approves all of the loan elements – your financial documents, the property information, and the contractor’s bid and scope of work – you can close on the home. Closing is when you sign all of your loan documents and officially become the owner.

You will receive the keys to the home on your funding date, which is usually within a few days of closing.

Step 6: Your draw period and renovations begin

Now that you’re the homeowner, renovations can begin! The first step is to start distributing draws to your contractor.

What is a “draw”? It’s simply a withdrawal from the renovation fund which goes to pay the contractor as they start certain milestones in the plan.

Levitt says that USDA renovation homeowners working with Fairway typically hear from a draw administrator within 48 hours of closing. The draw administrator oversees your renovation fund and coordinates payments to your contractor.

The draw team works closely with your contractor throughout the renovation process to ensure they are being paid and that the work is progressing.

When you are deciding on a lender for your USDA renovation loan, ask whether they service the loan in-house or sell it to a third party. Many lenders sell loans to third-party services after they close, including renovation loans.

Levitt noted that Fairway services renovation loans in-house while the work is being done so that you are working with the same team throughout the process. If your renovation loan is sold to a servicer immediately after closing, the new company will not have context for the work you’re having done or the renovation plans up to this point.

When your lender keeps the loan in-house, the draw team and the contractor should already be in contact. The draw team will also be familiar with the full scope of the project, which can prevent confusion, stress, and delays.

“Can you imagine if you called a vendor and said, ‘I have a question about my renovations and my mortgage, too,’ and they were like, ‘I have no idea what you’re talking about’?” Levitt says.

With so much on the line, be sure to ask your lender exactly what the renovation component of the loan looks like and who will service it while the work is being completed.

The USDA requires all renovation work to be done within six months of closing.

What happens if the renovations are not completed on time?

USDA renovation loans stipulate that the work on the home must be complete within six months.

However, lenders recognize that things happen. Sometimes contractors are unable to finish the job, or you need to fire them for other reasons. In some cases, the work takes longer than expected due to unforeseen issues with the home or supply chain issues with materials.

If it looks like your renovations will take longer than expected, talk to your lender immediately. Let them know the situation and what your next steps are for getting the work done.

The worst case scenario is that you don’t communicate at all with your lender and the renovations are not completed, Levitt says. In such an instance, your lender may apply your remaining renovation money to your loan principal and eliminate your renovation fund.

Then the balance on your mortgage will be lower, but you won’t have the funds available for continuing the repairs.

USDA renovation loan or USDA purchase loan: Which is better?

USDA renovation loans are great options if you’re prepared for the challenges of purchasing a fixer-upper and you can find a lender in your area that offers them.

Not all lenders offer USDA renovation loans, even if they offer standard USDA purchase loans. Fairway offers USDA renovation loans in some areas.

If your lender offers USDA renovation loans, you need to make sure you’re prepared for the realities of buying a fixer-upper.

Renovating can really make a house feel like a home, since you get to choose the new fixtures, paint, additions, and other changes. But renovations are tough, especially if you plan to live in the home while work is being done.

A lot can happen during the process, too. If your contractor bails or supply costs soar, you will have to find a new company to complete the work or find a way to cover those expenses.

Because contractors are in such high demand right now, you may have to wait awhile before the renovations can even begin.

With a USDA purchase loan, on the other hand, you don’t have to book a contractor or submit a bid in order for the loan to close. The loan process is a lot more straightforward, and you don’t have to worry about living in a construction zone.

If the house is a bit outdated or the work needed isn’t urgent, you might consider buying with a traditional USDA loan and renovating later. Once you’ve built some equity in the home, you can use a cash-out refinance, home equity loan, or home equity line of credit (HELOC) to finance upgrades and repairs then. This option also gives you a chance to get to know the home and really think about what you want to do with it.

A USDA renovation loan has the benefit of financing the purchase and repairs in one loan. But you have to decide on repairs, colors, fixtures, and other details before you’ve spent much time on the property.

In summary, one isn’t necessarily better than the other. Both have their pros and cons, but a USDA purchase loan is easier and more straightforward for the homebuyer.

Alternatives to USDA renovation loans

If you’re not eligible for a USDA renovation loan, there are other renovation options:

• FHA 203k renovation loans
• VA renovation loans
• Fannie Mae HomeStyle conventional renovation loan
• Freddie Mac CHOICE Renovation

You can also buy a fixer-upper with a traditional purchase loan and borrow against your home equity later on to pay for renovations. Or, you can get estimates for the work once you’ve closed on the home and save up to pay cash for the renovations.

Related reading: Fixer-Upper Loans: How to Pay For That Home That Needs Some Extra Love

A hack for the hardy homebuyer

USDA renovation loans can help you get a foot in the door of the homebuying market by skipping the bidding wars and the escalating prices on newer or more well-maintained homes. But they’re not for the faint of heart.

If you’re willing to do the legwork of finding a contractor, and you’re OK with the first few months of homeownership being all about renovations, a USDA renovation loan may be perfect for you.

But if you don’t have the time, energy, or lifestyle flexibility for a renovation, that’s OK, too. A USDA purchase loan is a fantastic option for buying with 0% down. And if you don’t qualify for a USDA mortgage loan, there are lots of other no and low-down payment options.

And if buying a fixer-upper with a USDA loan sounds great, but you’re not sure you’re up for it? You don’t have to decide alone. Work with a real estate agent and lender who can help you understand the pros and cons. They’ll help you find a house and a loan you can turn into your dream home.

Can you buy a fixer-upper with a USDA loan? FAQs

Get started with a USDA renovation loan today

Why compete with all the other buyers out there who are looking for turn-key homes? Learn about this valuable tool which allows you to buy a fixer-upper at zero down.

USDA Guaranteed Rural Housing loans subject to USDA-specific requirements and applicable state income and property limits. Fairway is not affiliated with any government agencies. These materials are not from USDA or RD and were not approved by USDA or RD or any other government agency.

*Debt-to-income (DTI) ratio is monthly debt/expenses divided by gross monthly income.

**Pre-approval is based on a preliminary review of credit information provided to Fairway Independent Mortgage Corporation, which has not been reviewed by underwriting. If you have submitted verifying documentation, you have done so voluntarily. Final loan approval is subject to a full underwriting review of support documentation including, but not limited to, applicants’ creditworthiness, assets, income information, and a satisfactory appraisal.