How To Save with USDA Construction Loans When Building a New House

What You'll Learn in This Article

• Key Features of USDA Construction Loans
• USDA Construction Loan Requirements
• USDA-Approved Contractors
• Key Requirements for USDA-Approved Contractors
• How to Get a USDA Construction Loan for Home Building

If there’s one thing that characterizes rural areas, it’s the abundant amount of land available for home building. Buying and building can often be a good real estate strategy, but too often the process requires two loans, two closings, and lots of needless expenses. With USDA construction loans, you only need one closing. That means big savings upfront, plus – with needed financing in hand to both buy property and build a home – there’s less worry and hassle.

What do USDA construction loans cover?

USDA construction loans are designed to assist borrowers in two areas. First, the acquisition of raw land. Second, the construction of a home.

Costs that are covered by a USDA single-close construction loan include:

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

Additional costs that may be paid for with your USDA construction loan include surveys, permits, appraisals, inspections, architectural design plans, plan reviews, and lender construction administration fees. Your lender is responsible for paying the builder as work is completed.

Key Features of USDA Construction Loans

Single-Close Loans

One of the most convenient features of USDA construction loans is that they are single-close loans. This means that the loan process is simplified into one application and one closing process for both the property’s acquisition and construction.

For most other loan programs, building a new home requires two loans: one for buying the property and a second loan for building. Each of these loans must go through the closing process individually. A second closing can mean additional costs for title insurance, transfer taxes, new financing, legal fees, etc. These expenses add up and can represent big money.

However, with a USDA single-close construction loan, borrowers only go through the closing process once. This saves time, reduces paperwork and minimizes closing costs.

Construction-to-Permanent Loans

For non-USDA construction loans, the transition from the initial construction loan to a permanent mortgage can be complex and costly. However, USDA single-close construction loans are designed to smoothly transition into a permanent mortgage without needing additional loans or refinancing.

USDA construction-to-permanent loans combine a construction loan with a traditional USDA loan in a single mortgage. Once your new home is completed, your construction loan will automatically transition into a standard 30-year, fixed-rate USDA mortgage.

Construction Financing with No Money Down

One of the most important features of USDA construction loans is the ability to finance your new home build with no down payment. This is a rare perk. Most real estate financing requires a significant down payment. However, without a down payment requirement, borrowers can more readily afford USDA financing. As with any USDA loan, the homebuyer must meet income and eligibility requirements.

USDA Construction Loan Requirements

All mortgages have certain requirements, such as so much down or a given credit score. USDA construction loan requirements follow the usual standards needed for USDA financing, but with adjustments so that construction can be funded. For example:

• The home must be constructed according to certified plans and specifications.
• The construction must meet or exceed the International Energy Conservation Code (IECC) in effect at the time of construction.
• There must be three inspections as construction progresses.
• There must be a Certification of Occupancy.
• The builder must warrant work performed and materials supplied for 12 months.
• The builder must provide a 10-year structural warranty.
• If the home comes in under budget, any excess money must be used to reduce the debt.
• USDA construction loans can be used with residential single-family homes, including modular and manufactured structures. Condominiums, according to the USDA, including detached condominiums and site condominiums, are not eligible for the program.

USDA-Approved Contractors

Only USDA-approved contractors can provide builder services. Contractors must meet specific financial, licensing, and experience criteria to ensure they can complete the project according to USDA guidelines.

Key Requirements for USDA-Approved Contractors

• Must be licensed, insured, and bonded in the state where the home is being built.
• Have a minimum of 2 years of experience building single-family homes
• Must not have any past bankruptcies, foreclosures, or major financial instability.
• Provide evidence of a minimum of $500,000 in commercial liability insurance.
• Must agree to build the home following USDA construction and property standards.
• Must provide a one-year warranty on the home after completion.
• Pass a background check, proving no past felonies.
• Must have an acceptable credit history.

How to Get a USDA Construction Loan for Home Building

If you're considering a USDA single-close construction loan, here are the steps you should follow to increase your chances of approval and ensure a smooth experience.

1. Research Lenders Who Offer USDA Construction Loans

The first step is to find lenders that offer USDA construction loans. Compare the services, interest rates, and fees from several lenders to find the best match for your financial situation.

2. Select a USDA-Approved Contractor

Once you have a lender in mind, the next step is to choose a USDA-approved contractor or builder. This is crucial, as an approved contractor is a loan requirement.

Your lender may provide a list of approved contractors, or you can contact the USDA directly for recommendations. Make sure your chosen contractor has experience in completing projects that meet USDA standards and regulations.

3. Find Land in a USDA-Eligible Area

Before you can proceed, you need to secure a plot of land in an area that’s eligible for USDA financing. USDA loans are intended to promote development in rural areas, so the land must meet certain location requirements to qualify for a USDA construction loan.

Visit our interactive USDA eligibility map to help determine if your area meets the rural requirement.