USDA Appraisal & Inspection Requirements

When navigating the home-buying process, understanding appraisal and inspection requirements can be crucial, especially for those interested in a USDA Loan— specifically the Single Family Housing Guaranteed Loan Program. This article will guide you through what is needed and when these elements surface in the home-buying process.

 

What is a USDA Loan?

USDA Loans offer a 0% down payment option, an attractive choice for buyers in rural areas. This type of loan facilitates homeownership in less urbanized locations, providing a unique opportunity for many buyers. Also known as RD Loans, flexible credit and income requirements are a perk of the program.

 

The USDA Inspection Process

The USDA mandates comprehensive inspections to ensure the homes they finance are safe, healthy, and durable. While cosmetic issues like mismatched trim or stained carpets are acceptable, any problems that could affect the home’s long-term integrity will need to be addressed.

 

Property Site Requirements

Before diving into the specifics of a home’s structural and functional criteria, it’s important to understand the property site requirements for USDA Loans. These requirements are crucial in determining if a property is eligible for USDA financing. They ensure that the home is not only in a suitable location, but also aligns with the standards set for rural development and safe housing.

Let’s explore these requirements:

• Must be located in a rural area, as designated by the USDA.
• Must be a “modest” home compared to its surrounding area in regard to home dimensions and property size.
  • Typically, homes should be under 2,000 square feet, and within a reasonable market value compared to similar nearby properties.
• Can’t have income-producing structures or leased land.
• Must have street access.
• Must have adequate, working, and safe utilities (water, power, gas, wastewater disposal, etc.)
  • Wells, propane tanks, septic systems, etc. are all acceptable if in working, safe condition.
  • Water pressure must be adequate for waste removal.

 

Appraisal Requirements for USDA Loans

The property must meet all of the following criteria to qualify for a USDA Loan:

• Must be structurally sound.
  • No major cracks, gaps, or visible deterioration of the foundation.
  • There must not be obvious structural deterioration.
• Must have safe, working utilities.
  • Conditions are often set by local and state authorities. For example, your septic system is graded per your local health laws and building code.
• Must be in good repair—and if not, the loan must have a condition to repair it with loan funds.
  • Roof must be in good shape, and not allow any moisture into the home. No more than three layers of material are allowed.
  • Chipped or peeled paint must be remedied. This is especially important if the home was built before 1978, as lead paint was widely used prior.
  • Missing siding, roof shingles or trim, or soffits are not acceptable.
  • Windows and doors must be in good condition. No cracks, holes, or gouges allowed.
  • Flooring should be complete and in good health.
  • Porches, decks, patios, and garages must not have obvious hazards or deterioration.
  • Railings must be installed on stairways.
  • Electrical cannot have exposed wiring, including covers on outlets, light switches, and junction boxes.
  • Furnace, central AC, water faucets (including toilets), water heater, and venting should be in working condition.
  • No active termite infestations.
• Crawlspaces and attics must be accessible.

 

What Happens if My House Doesn’t Pass Inspection?

If a property fails to meet these requirements, options include requesting repairs or considering other properties. Sometimes, repairs can be integrated into the loan terms.

Immediate Results of a Failed Inspection
A failed USDA inspection indicates that the property does not meet specific health, safety, or structural standards set by the USDA. This failure can result from various issues, ranging from significant structural problems to minor, but essential repairs.

Options Following a Failed Inspection

1. Request Repairs from the Seller: The simplest approach is to ask the seller to make the necessary repairs. This request is often made through a formal process where the buyer’s agent communicates with the seller’s agent, outlining the needed repairs as indicated in the inspection report. Necessary repairs (those required by the USDA) must be completed before closing in order to pass inspection.
2. Renegotiate the Purchase Price: If the cost of repairs is substantial, buyers might renegotiate the home’s price to account for these expenses. This negotiation can lead to a reduced price, making room in the budget for future repairs.
3. Use Loan Funds for Repairs: For certain types of repairs, it might be possible to include the repair costs in the loan amount, subject to USDA loan guidelines. This option allows the buyer to finance the repairs over the life of the mortgage.
4. Buyer-Funded Repairs: If the seller is unwilling or unable to make the repairs, and the buyer is still interested in the property, the buyer might choose to pay for the repairs themselves. This decision should be made cautiously, considering the cost and extent of the required repairs. As the USDA requires, necessary repairs must be completed before closing.
5. Seek a Repair Agreement: In some situations, both parties might agree to a repair agreement, where both contribute to the cost and execution of the necessary repairs.

What Happens if No Agreement is Reached?
If the buyer and seller cannot agree on handling the required repairs, the buyer might have to walk away from the deal, especially if the issues are significant and affect the property’s safety or livability.

 

What Happens if the Appraisal is Lower Than Offer?

An Appraisal Gap occurs when there is a discrepancy between the selling price of a home and its appraised value determined by a professional appraiser.

For example, if a home is under contract for $250,000 but the appraised value comes in at $240,000, there is a $10,000 appraisal gap.

For USDA Loans, the appraisal gap can present a unique challenge. Since these loans often offer 100% financing with no down payment, the loan amount is heavily reliant on the appraised value of the property. If the appraised value is less than the sale price, it can create complications in financing.

1. Renegotiate the Sale Price: Work with your real estate agent to negotiate a lower sale price that aligns with the appraised value.
2. Cover the Gap: If you have the means, you can pay the difference between the appraised value and the sale price.
3. Seeking a Reconsideration of Value: If there are valid reasons to believe the appraisal was inaccurate or too low, seeking a second opinion or requesting a reevaluation from the appraiser may be a viable option.
4. Walk Away: If the gap is too significant and other options are not feasible, the buyer may choose to walk away from the deal, especially if there are contingencies in place for financing or appraisal.

Being prepared and understand your options! Lean on your real estate agent and lender for guidance— they see this every day!

 

Work with a USDA Expert

Given the complexity of USDA Loans, partnering with an expert is vital. While some online lenders may shy away from intricate deals, finding a knowledgeable and willing lender can make a significant difference in navigating these requirements successfully.

Treadstone Funding is well-versed in USDA Loans in Michigan— give us a shout to see if you’re qualified!

This article is for informational purposes only. Consult a professional for specific advice regarding your situation. USDA Loan availability and terms are subject to change based on government regulations and policies.

 

Frequently Asked Questions

What happens if appraisal is higher than purchase price?
If an appraisal is higher than the purchase price, it’s generally a positive outcome for the buyer, as it results in immediate home equity. For example, if the home is purchased for $200,000 and appraised at $220,000, the buyer instantly gains $20,000 in equity. While this higher appraisal can facilitate easier loan approval due to a lower loan-to-value ratio, it doesn’t increase the loan amount, which is still based on the purchase price.

Additionally, with a higher appraised value, you may be able to roll additional closing costs into your mortgage, directly decreasing the amount of money needed at closing. Under the right circumstances, it could be $0!

Does a messy house effect my home appraisal?
A messy house typically does not directly affect an appraisal, as appraisers focus on the home’s condition, size, features, and comparable property values. While extreme neglect might raise concerns about maintenance and upkeep, normal clutter, and day-to-day living are not considered in the appraisal value.

Why would a USDA Loan get denied?
A USDA Loan could be denied for reasons such as income exceeding USDA limits, the property not meeting eligibility criteria (like location or condition), credit issues, or debt-to-income ratios that are too high. Accurate and complete documentation is crucial for approval.

How long does USDA approval take after underwriting?
USDA approval times after underwriting can vary, typically ranging from a few days to a couple of weeks. The timeframe depends on the complexity of the loan file, the workload of the USDA, and the efficiency of the lender in processing and submitting the necessary documents. Good news, Treadstone is an incredibly efficient lender!

Is USDA stricter than FHA?
USDA Loans can be seen as stricter than FHA Loans in certain aspects, like property location and income limits. However, they offer benefits like no down payment. FHA Loans are more flexible with credit scores and down payments, but they require mortgage insurance regardless of the down payment size.