USDA Construction Loans: Requirements, Rates & Approved Builders

What You'll Learn in This Article

• How Does a USDA Construction Loan Work?
• What Do USDA Construction Loans Cover?
• Construction Loan Requirements
• USDA Approved Contractors
• How to Get a USDA Construction Loan for Home Building

If you want to build a custom home in a rural area, a USDA construction loan may be the most affordable path available. With zero down payment, a single closing, and a loan that automatically converts into a 30-year fixed mortgage, it's one of the few programs that covers land acquisition, construction costs, and permanent financing in one shot.

This guide covers everything you need to know: how USDA construction loans work, current borrower and property requirements, how to find USDA-approved contractors by state, and how to get your USDA construction loan.

How Does a USDA Construction Loan Work?

The USDA single-close construction loan combines three financing needs into one:

1. Land purchase: Covers the cost of acquiring the lot or pays off any remaining balance on an existing land loan. Already own your land? You can roll an existing land loan balance into the USDA construction loan, which can improve your loan-to-value ratio and lower your monthly payment. However, USDA does not allow you to take cash out, so you cannot reimburse yourself if you paid cash for the land.
2. Construction costs: Funds are disbursed in stages, or draws, to your builder as the builder completes work at agreed milestones.
3. Permanent mortgage: Once construction wraps up and a certificate of occupancy is issued, the loan automatically converts to a 30-year fixed-rate USDA mortgage.

What is the Draw Process?

Funds are released at construction milestones, typically during foundation building, framing, mechanical rough-in, and final inspection. Your lender manages disbursements and coordinates required inspections throughout.

What Do USDA Construction Loans Cover?

USDA construction loan funds can be applied to:

• Land acquisition costs, including paying off the outstanding balance if you’ve previously purchased your land.
• Construction costs, including hard costs (such as all items detailed in the contract and subcontractor costs) and soft costs (such as survey, permits, appraisals, etc.)

USDA construction loans don’t cover vacation homes, investment properties, or income-producing properties are not covered. ADUs (accessory dwelling units) may be eligible under this specific program as long as it’s not designed for rental income.

USDA Construction Loan Requirements

Property Requirements

The property must be:

• Located in a USDA-designated rural or suburban area — see the USDA’s eligibility map for more information.
• A single-family primary residence, including site-built, modular, or eligible manufactured housing.
• Modest in size, typically under 2,000 square feet.

Construction-Specific Requirements

You must:

• Find a USDA-approved contractor with at least 2 years of experience. The builder must warrant all work and materials for 12 months and provide a 10-year structural warranty.
• Obtain a detailed set of plans, permits, a budget, and a construction timeline.
• Construction must begin shortly after closing and cannot be used to purchase land with an indefinite delay before building.

USDA-Approved Contractors

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

Key Requirements for USDA-Approved Contractors

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.
• Provide evidence of a minimum of $500,000 in commercial liability insurance.
• Agree to build the home following USDA construction and property standards.

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.

Get prequalified by meeting your lender’s requirements for the loan.

2. Select a USDA-Approved Contractor

The next step is to choose a USDA-approved contractor or builder.

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

3. Find Land in a USDA-Eligible Area

Next, secure a plot of land in an eligible area 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.

Finally, develop a construction plan with your contractor and submit your loan application to your lender with your detailed construction plan. After reviewing all documents, your lender will send it to the USDA to approve it.