Everything You Need to Know About USDA Construction Loans in Colorado

The United States Department of Agriculture (USDA) offers an attractive construction loan program for eligible homebuyers in rural areas of Colorado. This unique one-time close loan combines three major steps of the homebuying process – purchasing land, financing construction, and obtaining a traditional mortgage – into one simplified loan product.

While most conventional lenders require anywhere from 10-20% as a downpayment on a home loan, the USDA construction loan program requires zero downpayment and offers 100% financing. This makes homeownership accessible and affordable for many first-time and moderate-income buyers.

However, as with any government-backed loan program, applicants must meet certain eligibility criteria related to their finances, credit history, debt-to-income ratio, and more. The property itself must also meet USDA requirements related to location, appraised value, environmental standards, and energy efficiency.

This article will break down everything you need to know as a homebuyer interested in USDA construction loans in Colorado including

• Overview of the USDA Rural Development Program in Colorado
• Benefits and drawbacks of USDA construction loans
• Step-by-step process to apply and qualify
• Interest rates and fees to expect
• Income and property eligibility requirements
• Alternatives to explore if you don’t qualify

Let’s get started!

Overview of USDA Rural Development in Colorado

The USDA’s Rural Development program aims to help improve the economy and quality of life in rural America. They offer several home loan, grant, and business funding programs tailored specifically to rural communities.

According to the USDA, over 1.1 million Colorado residents live in eligible rural areas. These are generally defined as towns, suburbs, or small cities with populations under 35,000. You can use their eligibility tool to see if your location qualifies.

The USDA Rural Development office for Colorado is located in Denver with area offices throughout the state. They partner with approved lenders to offer housing loans like the Single Family Housing Guaranteed Loan Program which backs USDA construction loans.

Benefits of USDA Construction Loans

The main benefits of using a USDA construction loan to build your home include:

• No downpayment required – The USDA guarantees 100% financing
• Low mortgage insurance – An upfront 1% guarantee fee and annual 0.35% fee
• Below market interest rates – USDA rates are very competitive
• One loan for everything – Construction, land, and mortgage combined
• One closing – Lower closing costs than multiple loans
• Fixed rate terms – 10, 15, 20, or 30 year options available

For the right borrower, a USDA construction loan can be an affordable way to achieve homeownership, especially when lacking the savings for a downpayment on a conventional loan.

Potential Drawbacks to Consider

However, there are some potential drawbacks to weigh as well:

• Strict income limits – Household income must be below area median
• Competitive approval – Fair to good credit scores often needed
• Geographic restrictions – Home must be in eligible rural location
• Limit on luxury features – Modest home designs are encouraged
• Potentially higher rates – Compared to conventional loans
• Fees involved – 1% upfront and 0.35% annual mortgage insurance fees
• Lengthy process – More complicated than conventional loans

As you can see, USDA construction loans are not for everyone. Make sure you fully understand the requirements and restrictions before applying.

Step-by-Step Process to Obtain a USDA Construction Loan

If you think a USDA construction loan may be right for you, below are the typical steps involved:

1. Check income eligibility – Your household income must fall under income limits based on family size and county location.

2. Find a property and get pre-qualified – Work with a real estate agent to identify land and get a pre-qualification letter from a USDA approved lender.

3. Select a USDA approved builder – Your chosen builder must meet all USDA contractor requirements.

4. Submit loan application with plans – Work closely with your lender to complete the full application, including construction plans.

5. Obtain financing approval – The lender will underwrite and approve your loan once all eligibility requirements are verified.

6. Close on land and start construction – At closing, funds are released to purchase the lot and start building.

7. Construction phase – Your lender will work with you and release funds in phases based on inspection reports.

8. Full mortgage assigned – Once construction is complete, your loan converts into a traditional fixed rate mortgage.

As you can see, USDA construction loans require careful coordination between yourself, the lender, builder, and USDA. Timelines can vary drastically, but expect around 6-12 months from start to finish.

Interest Rates and Fees for USDA Construction Loans

As a government guaranteed loan, USDA construction loan rates are very competitive with conventional mortgage rates. Here are the costs you can expect:

• Interest rate – Fixed rates in the mid 4% to high 5% range
• Upfront guarantee fee – 1% of the loan amount
• Annual guarantee fee – 0.35% of the loan balance
• Maximum loan amount – Varies by county, typically $420,000 to $625,000
• Mortgage term options – 10, 15, 20, or 30 year fixed terms

Rates and fees are dependent on your finances, loan amount, and other factors. Be sure to shop multiple USDA approved lenders to find the best deal. Our interest rate comparison tool makes it easy.

Income and Property Eligibility Requirements

To qualify for a USDA construction loan in Colorado, you must meet certain eligibility standards set by the agency. These relate to your finances, creditworthiness, debt ratios, and more.

Borrower Eligibility Requirements

• Income limits – Varies by family size and location, typically 80-115% of area median income
• Credit score – At least 640, but many lenders require 680+
• Debt-to-income ratio – Max of 29% housing DTI and 41% total DTI
• Cash reserves – Expect 2-6 months of mortgage payments in reserves
• Citizenship – At least one borrower must be a U.S. citizen or permanent resident
• Homebuyer education – May be required for first-time homebuyers

Property Eligibility Requirements

• Location – Must be in a designated USDA rural area
• Primary residence – No vacation or investment properties
• Appraisal – Home must appraise for the loan amount
• Modest housing – 3-4 bedrooms, 2 bathrooms typical
• Existing homes – May qualify on case-by-case basis
• Manufactured housing – Must be on permanent foundation on owned land

Be sure to double check all requirements with a USDA approved lender before applying.

Alternative Construction Loans to Consider

If you don’t qualify for a USDA construction loan, don’t fret. Here are a few alternative construction and renovation loan programs to consider:

• FHA 203(k) Loan – Finance purchase + renovations with 3.5% down
• VA One-Time Close – 100% financing for veterans, no downpayment needed
• Conventional Construction Loans – Typically require 10-20% downpayment
• FHA One-Time Close – As little as 3.5% downpayment required
• Renovation Loans – Finance improvements to existing homes

The right loan program will depend on your financial situation, credit score, downpayment, and more. Be sure to get pre-approved and compare multiple loan estimates before deciding.

Is a USDA Construction Loan Right for You?

While certainly not for everyone, USDA construction loans can be a viable option for eligible borrowers to build a home in rural Colorado with zero downpayment required.

Just be sure to carefully consider both the benefits and potential drawbacks before jumping in. And don’t forget to explore alternative construction loans if you don’t initially qualify for the USDA program.

For help assessing your home loan options, contact a recommended lender today to get pre-qualified. They can guide you through the mortgage process from