7 C.F.R. § 3555.202 – Dwelling requirements.

(a) New dwellings. New dwellings must be constructed in accordance with certified plans and specifications, and must meet or exceed the International Energy Conservation Code (IECC) in effect at the time of construction. The lender must obtain and retain evidence of construction costs, inspection reports, certifications, and builder warranties acceptable to Rural Development.
(b) Existing dwellings. Existing dwellings are considered to meet the following criteria when inspected and certified as meeting HUD requirements for one-to-four unit dwellings in accordance with Agency guidelines:
1. (1) Be structurally sound;
2. (2) Be functionally adequate;
3. (3) Be in good repair, or to be placed in good repair with loan funds; and
4. (4) Have adequate and safe electrical, heating, plumbing, water, and wastewater disposal systems.
(c) Escrow account for exterior or interior development. This paragraph does not apply if the development is related to a “combination construction and permanent loan” under § 3555.101(c). If a dwelling is complete with the exception of interior or exterior development work, Rural Development may issue the Loan Note Guarantee on the loan if the following conditions are met:
1. (1) The incomplete work does not affect the habitability of the dwelling, nor the health or safety of the housing occupants.
2. (2) The cost of any remaining interior or exterior work is not greater than 10 percent of the final loan amount.
3. (3) An escrow account is funded in an amount sufficient to assure the completion of the remaining work. This figure must be at least 100 percent of the cost of completion but may be higher if the lender determines a higher amount is needed.
4. (4) The builder or a licensed contractor has executed a contract providing for completion of the planned development within 180 days of loan closing. If the borrower will be completing the planned development on an existing dwelling without the services of a contractor, the requirement for an executed contract is waived when all of the following conditions are met:
  1. (i) The estimated cost to complete the work is less than 10 percent of the total loan amount;
  2. (ii) The escrow amount is less than or equal to $10,000; and
  3. (iii) The lender has determined the borrower has the knowledge and skills necessary to complete the work.
5. (5) The lender may release escrowed funds only after obtaining a final inspection report acknowledged by the borrower and indicating all planned development has been satisfactorily completed.
6. (6) The lender remains responsible to ensure a final inspection is performed and required repairs are completed.
7. (7) The settlement statement reflects the amounts escrowed.