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USDA Construction Loans for Building a New House

A USDA construction loan is a type of mortgage offered through the United States Department of Agriculture (USDA). These loans are designed to help individuals in rural areas finance the construction of a new home with USDA-backed financing through the Single Family House Guaranteed Loan Program.

Whether you’re just starting to explore your options or you’re ready to dive into the application process, this guide aims to provide you with a clear understanding of how USDA construction loans work and how you can leverage them to bring your dream home to life. We’ll walk you through what USDA construction loans are, including key features, requirements, and pros and cons; then, show you the steps to secure a USDA construction loan to build your dream home.

What is a USDA construction loan?

USDA construction loans are also known as USDA construction-to-permanent loans or USDA one-time close construction loans: they are a special type of home loan that allows you to finance both the purchase of land and the construction of a new house on that land under one mortgage

Unlike traditional home purchase loans, which require you to have a house already built and ready to purchase, USDA construction loans focus on those who want to start from scratch, offering a path to homeownership through custom-building their house.

What do USDA construction loans cover?

USDA construction loans are designed to be comprehensive, covering a wide array of costs to ensure that borrowers can manage the financial aspects of building a home from the ground up.

Costs that are covered by a USDA single-close construction 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
  • Costs to acquire the land or pay off the balance of the land

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 managing the disbursement of the loan proceeds to the builder or contractor for costs associated with the home.

Key Features of USDA Construction Loans

Single-Close Loans

One of the most convenient features of USDA construction loans is that they are single- or one-time-close loans. This means that the loan process is simplified into one application and one closing process for both the construction phase and the final mortgage.

For most other loan programs, building a new home requires two loans: one for the construction phase and another for the mortgage once the home is built. Each of these loans must go through the closing process individually.

However, with a USDA single-close construction loan, borrowers only have to go through the closing process once. This not only saves time and reduces paperwork but also 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 from the construction phase to the 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 to a traditional 30-year fixed-rate USDA mortgage.

Construction Loan with No Money Down

One of the most remarkable features of USDA construction loans is the ability to finance your new home build with no down payment. This is a rare perk compared to other construction loans since traditional lenders often require a significant down payment for a larger upfront cost.

USDA Construction Loan Requirements

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

  • 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 toward the loan principle.
  • Funds may be used to construct a single-family home, manufactured home, or eligible condominium.

USDA Approved Contractors

The USDA requires that the lender approve any builders or contractors you wish to use. 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

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 a lender that offers USDA construction loans. Since these loans are less common, researching lenders may require some extra effort.

Start by contacting banks and credit unions in your area, as they are more likely to be familiar with the needs of the local community. Compare the services, interest rates, and fees of multiple lenders that offer USDA construction loans 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 contractor or builder who is approved by the USDA. 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 that 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 is 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.