Understanding USDA Home Loan Repair Requirements and Improvements

Are you eligible for a USDA 504 repair loan?

Senior citizens giving the thumbs up to the USDA 504 repair loanThe United States Department of Agriculture (USDA) offers a home repair program known as Section 504 that provides government-backed loans to eligible rural homeowners.

This program is designed to help very low-income households repair, improve, or modernize their homes. In order to be eligible for this program, homeowners must meet certain income and credit criteria. The USDA mortgage loan program can be a great option for those who otherwise might not be able to afford home repairs.

I admit that the loan/grant program is a little confusing. In a nutshell, this is how the Section 504 program operates.

The USDA 504 repair program is exclusively accessible to very low-income applicants aged 62 or older. At least one borrower must be above the age of 62.

A very low income borrower is defined as one who earns less than 50% of the region median income.

Low income borrowers are a step up from very low income borrowers. The term "low income" refers to income that is between 50% and 80% of the area median income.

Borrowers characterized as low income are not eligible for the loan or grant program.

Repair loans of up to $20,000 are available, while grants of up to $7,500 are also available.

The USDA decides if the borrower(s) is financially capable of repaying the loan; and if the borrower is financially capable of repaying the loan, the USDA calculates the monthly payment.

If the USDA determines that the applicant is in capable of repaying a loan, the USDA provides a grant.

Keep in mind that there are two options, loan and grant.

Are There Income Limits With the USDA 504 Repair Loan?

504 loan funds may be used to renovate, repair or update an existing structure, to make it decent, safe, and hygienic, and/or to eliminate health and safety problems.

Section 504 grant monies may be used exclusively to repair or enhance health and safety risks, or to repair or rebuild residences to make them accessible and usable for household members with disabilities.

Borrower Income Limits

The adjusted gross income during the time of loan/grant approval and at the loan closing, should never exceed the limit for very low-income home buyers. Low-income applicants are not permitted to receive Section 504 assistance.

If a budget analysis, using Form RD 1944-3, indicates that a grant applicant has the capacity to make a partial payment, the maximum amount of the loan amount should be issued as a loan, with just the remainder issued as a grant.

Credit Requirements for a 504 USDA Loan

Applicants who are solely receiving grant assistance are not required to submit a credit history analysis.

To qualify for the section 504 loan, applicants must have a credit history that demonstrates a reasonable desire and capacity to repay debt.

Applicants having a credit score of 620 or above are exempt from completing Form RD 1944-61 (Credit History Worksheet) or undergoing further examination.
These candidates are judged to have a credit history that is acceptable.

Borrower(s) who have a pending judgment against them in a Federal court, other than the United States Tax Court, are ineligible for a Section 504 grant or loan.

Asset Limitations

Only assets that can be converted to cash within 90 days or less are included in the calculation of non-retirement assets. Asset requirements are identical to those of Section 502, with the exception that non-retirement assets exceeding $15,000 (or $20,000 for an elderly household) must be used to reduce the Section 504 request.

Restricted Use of USDA 504 Loan Funds

Section 504 grant funds or loan may not be used to or for:

  • Acquisition or construction of new buildings
  • Consolidate debt
  • Off-site upgrades (i.e. sewer line) are ineligible
  • Preparation of the site or landscaping
  • Purchase and installation of appliances

USDA Section 504 Eligibility Qualifications

Small house in a rural areaHomeowners must have a very low income (less than 50% of the area median income) and be unable to get credit at a reasonable interest rate.

Repairs and improvements must improve the sanitary and safety conditions of the residence and/or remove safety and health issues.

One of the borrower(s) must be at least 62 years of age or older. Grants are available to homeowners aged 62 or older who are unable to repay a Section 504 loan.

What Are the Terms of a 504 USDA Home Loan?

Grants of up to $7,500 and loans of up to $20,000 are available to qualified candidates.

Loans with a 1% interest rate are available for up to 20 years. (If the loan amount is less than the applicant's maximum repayment ability, the term of the loan will be reduced.)

If the applicant is financially capable of repaying a part of the cost, a loan/grant combination will be offered.

Loan and grant combinations must be amortized over the entire 20 years to maximize the loan amount while minimizing the grant amount.

Maximum Mortgage Amount Based on Eligible Costs:

The applicant may only obtain a grant/loan money to cover allowable costs. For example, if the eligible repairs total $5,000, the loan/grant allowed would be $5,000. Cash back at settlement is prohibited.

Property Requirements and Restrictions

  • An in ground pool is prohibited
  • The dwelling must not have a value in excess of the typical area loan limit.
  • The homes must be deemed modest.

Mobile homeMobile or manufactured homes: Additionally, Section 504 loan and grant monies may be utilized to rehabilitate mobile or prefabricated houses provided the following conditions are met:

Prior to completing an application, the borrower must own the mobile home or manufactured home, as well as the property on which the dwelling is situated and is inhabited.

The modifications are necessary to eliminate health or safety problems, and the residence is permanently supported under Section 504.

Rehabilitation Standards

Homes that have been repaired must preserve a modest look, and any further work must comply to applicable municipal codes and standards.

Rural Housing Service guidelines should be met for water sewage and supply disposal systems.

Significant safety and health issues must be addressed.

Not all existing risks must be eradicated, as long as the property does not continue to pose significant health or safety dangers after the completion of the proposed repairs.

Lien Security

Loans greater than $7,500 must be secured by a mortgage on the property.

Section 504 grant money does not need any security, however, the grantee (borrower) must sign Form 3550-24 Grant Agreement, which stipulates that grant funds must be repaid in full if the property is sold within three years and are subject to recapture.

How Do I Apply for a Loan From the USDA?

To apply for a home repair loan, you must first fill out an application and submit it to the USDA. You can find the application online at the USDA website. Once you have submitted your application, a representative from the USDA will contact you to discuss your eligibility for the loan.

Approval Timeline

Typically, Rural Development will make a decision on the application within 30 to 60 days after receipt.

Whenever possible, approvals are conditional on the availability of funding.




In conclusion, the USDA 504 repair requirements for 2022 are important to be aware of if you are planning to go through with a renovation project. Meeting these requirements will help ensure that you receive the full benefits of the loan.

SOURCE: Single Family Housing Repair Loans & Grants

Recommended Reading

  1. Understanding the Underwriting Process for a Mortgage
  2. The USDA Loan: How It Can Help You Build Your Home
  3. USDA Loans: How to Use Seller Concessions to Your Advantage