USDA Construction Loans for New Homes

Through the USDA’s combination construction-to-permanent loan or single-close loan, homebuyers wishing to build a home with a USDA loan can do so. The single-close loan combines a construction loan, or interim financing, with a traditional 30-year fixed USDA loan.

The primary benefit to homebuyers with a single-close loan is that there is only one closing, saving the homebuyer a considerable amount in closing costs. Additionally, with a USDA single-close loan, the lender receives the loan note guarantee before construction begins, creating added confidence.

Choosing a Contractor

To ensure success, the USDA requires that the lender approve any builders or contractors you wish to use. In order for the contractor or builder to be eligible to build your home using the USDA loan they must:

• Have a minimum of 2 years of experience building single-family homes
• Furnish a construction or contractor license
• Provide evidence of a minimum of $500,000 in commercial liability insurance
• Be free of open judgments and have a satisfactory credit history
• Pass a background check, proving no past felonies

If you have trouble finding a homebuilder who meets the above requirements, your lender may be able to help.

Eligible USDA Loan Costs for New Construction

With a USDA construction loan, your lender is responsible for managing the disbursement of the loan proceeds to the homebuilder or contractor for costs associated with the home.

Loan costs that are covered by the USDA single-close loan include:

• Costs detailed in the contract between the homebuilder and borrower
• Costs paid to subcontractors for work on the home, including items such as septic, driveways, utilities, and landscaping
• Cost to acquire the land or pay off the balance of the land

Additional costs that may be paid for with your USDA construction loan also include items such as surveys, permits, appraisals, inspections, architectural design plans, plan reviews, and lender construction administration fees.

Additional USDA Single-Close Loan Information

As with any USDA loan, the homebuyer must meet income and eligibility requirements and the property must be in a USDA-approved location. However, there are some additional stipulations, which include:

• The home meets current IECC, or subsequent code, for thermal standards
• The homebuyer must receive a new construction warranty from the builder
• Any excess funds from the construction must go directly towards the loan principle
• Funds may be used to construct a single-family home, manufactured home, and eligible condominiums