Can You Build a Home with a USDA Loan?

Buying or building a home is an exciting milestone in life For many Americans, homeownership signifies independence, family growth, and financial stability. However, the dream of owning your own home can feel out of reach due to the high costs involved This is where USDA loans come in.

USDA loans are mortgage loans backed by the U.S. Department of Agriculture (USDA). They help provide affordable financing to eligible borrowers in rural areas. With low and no down payment options, flexible credit requirements, and low interest rates, USDA loans open doors for moderate-income homebuyers.

One common question aspiring homeowners have is Can you build a home with a USDA loan? The answer is yes, you can finance new construction with a USDA loan under certain conditions.

An Overview of USDA Loans

Before diving into the details of building a home with USDA financing, let’s go over some background on USDA loans.

The USDA’s Single Family Housing Guaranteed Loan Program assists low- to moderate-income families living in rural areas to purchase homes These government-backed loans are offered by private lenders but guaranteed by the USDA

Some key features of USDA loans include:

• No down payment required – Borrowers can finance 100% of the purchase price.

• Low mortgage insurance – An upfront guarantee fee of 1% of the loan amount and an annual fee of 0.35% are charged.

• Flexible credit guidelines – Minimum credit scores between 580-640 are often accepted.

• Low interest rates – USDA loans offer competitive fixed rates compared to conventional loans.

• No income limits in some areas – Income limits vary by county but can be as high as 115% of the area median income.

• No first-time homebuyer requirement – Both first-time and repeat buyers can qualify.

To be eligible, you must meet the lender’s credit standards, stay within the USDA’s income limits for your area, and buy a home in an eligible rural location.

Can You Build a New Home with a USDA Loan?

Yes, it is possible to use USDA financing to build a brand new home. The USDA Single Family Housing Guaranteed Loan Program allows for new construction loans.

There are a few ways to go about this:

1. USDA Construction-to-Permanent Loan

Also called a one-time close loan, this option combines the construction loan and mortgage into a single loan with one closing. You get one long-term mortgage loan product versus separate short-term financing and permanent financing.

With a construction-to-permanent USDA loan:

• You pay one set of closing costs instead of two.

• You lock in your permanent mortgage interest rate upfront before construction starts.

• You only have to go through the mortgage underwriting process once.

• Payments may not be required during the building phase.

Not all lenders offer USDA construction-to-permanent loans. But this streamlined process can save you time and money if available.

2. Stand-alone USDA Purchase Loan

If the construction-to-permanent option isn’t available, you can get a standard USDA purchase loan after the home is built.

In this scenario, you would need to qualify and obtain separate construction financing while the home is being built. Once construction is finished, you can apply for the USDA loan to convert the construction loan into your permanent mortgage.

While not as seamless as the single-close loan, the USDA purchase mortgage can still allow you to buy the newly constructed property with no down payment and low mortgage insurance.

3. USDA Rural Housing Site Loan

Another choice is the USDA Rural Housing Site Loan, which provides financing to purchase a building site and make necessary infrastructure improvements. You can use this loan specifically to:

• Buy and improve an existing lot for home construction.

• Buy raw land and add essential infrastructure like well, septic, electricity, utilities, and driveway.

With a site loan, you must build a home within two years of closing. But this can allow you to buy the land first and handle construction financing separately.

Requirements to Build with a USDA Loan

Construction loans and mortgages – whether rolled into one or separate – must meet certain eligibility standards. Here are some key requirements to receive USDA financing for new construction:

Location Requirements

• The home must be located in a USDA-designated rural area. Eligible locations include rural communities up to populations of 35,000.

• The site needs to be large enough to support basic livability standards.

Borrower Requirements

• Credit score requirements vary by lender but often start around 640.

• Your total debt-to-income ratio should be below 41% in most cases.

• You must meet income limits based on the area median income where the home is located.

Property Requirements

• The home must be a single-family residence and your primary residence.

• Manufactured homes may be eligible if built to Uniform Building Code standards and permanently affixed.

Construction Requirements

• If building from scratch, you must use a USDA-approved contractor.

• Modular and manufactured homes must be new and not previously inhabited.

• The home must be under warranty and insured while under construction.

Loan Requirements

• Loan terms up to 33 years are available for new construction.

• The combined loan amount for land/construction cannot exceed the area’s loan limit.

• Any funds left after construction are complete must go toward your mortgage principal.

The Pros and Cons of Building with a USDA Loan

Constructing a home with USDA financing has several benefits:

Pros

• Requires no down payment or minimum cash investment

• Offers below-market interest rates

• Lower monthly mortgage insurance compared to FHA, VA, and conventional loans

• Can roll construction and permanent financing into one loan

• More flexible credit guidelines than conventional loans

However, there are also some potential drawbacks:

Cons

• Limited availability – not all lenders offer USDA construction loans

• Stricter location requirements compared to conventional loans

• Income limits may disqualify higher-income borrowers

• Upfront and annual guarantee fees add to costs

• Building a home takes more time than buying an existing property

• Construction loans can fall through if the build goes over budget

What About Buying Land Only with a USDA Loan?

As mentioned, the USDA Rural Housing Site Loan can help borrowers purchase and prepare land for building.

You may also be able to buy land only through other financing means, then later apply for a USDA construction-to-permanent or standard mortgage once you are ready to build.

However, there are some caveats with the USDA program:

• The USDA does not offer loans to only buy and hold land for future building.

• You cannot purchase land now with a non-USDA loan, then get a cash-out mortgage through the USDA later to reimburse yourself.

• If you already own land outright, you won’t get any cash back when obtaining a USDA construction loan. The loan must go fully toward construction costs and the permanent mortgage.

So while possible to buy land separately, you need to have a specific construction plan and timeline in place when using USDA financing.

Alternatives to Building with a USDA Loan

USDA construction loans are great options for eligible borrowers. But you may face challenges finding a participating lender, struggle with location restrictions, or exceed income limits.

In that case, alternatives like FHA, VA, and conventional construction loans are worth considering too.

Though they may require larger down payments, these loans can also let you buy land and build in more areas without income caps. An experienced loan officer can help you compare programs and interest rates to find your best match.

Key Takeaways – Can You Build a Home with a USDA Loan?

• Yes, new construction can be financed with a USDA-backed mortgage when program guidelines are met.

• USDA construction-to-permanent loans allow you to finance the land purchase, building, and permanent mortgage in one loan.

• You can also obtain separate construction financing, then get a traditional USDA purchase loan once the home is complete.

• Requirements include location in a rural zone, income limits, minimum credit scores, approved contractors for new builds, and more.

• Consider pros and cons like no down payment but potential lender limitations before applying.

• If a USDA loan won’t work, FHA, VA, and conventional construction loans are alternative options.

The bottom line – building a brand new home is possible with a USDA-guaranteed mortgage. This can help eligible borrowers construct their dream home for zero down payment. Carefully review program guidelines and work with a knowledgeable loan officer to navigate the construction loan process. With proper planning, you can fulfill your vision of building your own home through affordable USDA financing.