Can You Build a Home with a USDA Loan?

The USDA loan program provides many homebuyers the opportunity to purchase a home with little or no down payment. One common question homebuyers have is whether the USDA loan can be used to build a new home In this comprehensive guide, we will explain everything you need to know about using a USDA loan for new construction

What is a USDA Loan?

The USDA loan program is administered by the United States Department of Agriculture (USDA) to help low-to-moderate income buyers in rural areas purchase a home. Key features of the USDA loan include:

• Requires no down payment and finances up to 100% of the purchase price
• Offers low mortgage insurance premiums
• Features competitive interest rates
• Allows flexible credit guidelines

The USDA loan is ideal for eligible homebuyers who want to purchase a home but do not have funds saved up for a downpayment.

USDA Loan Requirements

To qualify for a USDA home loan, borrowers must meet certain requirements:

• Meet USDA income limits for their area
• Have a credit score of at least 640
• Occupy the home as their primary residence
• Purchase a property in an eligible rural location

In addition, the property itself must meet USDA requirements regarding its condition, access to utilities, environmental standards, and more.

Can You Use a USDA Loan To Build a New Home?

The short answer is yes, USDA loans can be used to finance the construction of a new home in most cases. However, there are some important caveats.

The USDA has specific guidelines regarding new construction loans that both borrowers and builders must follow. Here are some key points:

• The construction must take place on land that is already owned by the borrower. You cannot use a USDA loan to purchase land.
• The home must be built by a licensed and approved builder.
• Only “stick-built” site-built homes are allowed. Manufactured or mobile homes are not eligible.
• The builder must follow required standards and inspections throughout the construction process.
• The buyer will need to work with a lender experienced in USDA new construction loans.

Essentially, you can build a new home using USDA financing if you already own the land, use an approved builder, and follow the program guidelines.

The Construction Loan Process

Financing the construction of a new home is a multistep process that requires close coordination between the borrower, builder, and lender. Here is a general overview:

1. Find land. The borrower must first own a suitable lot for building. This is a key requirement, as the USDA loan cannot be used to purchase land.

2. Select house plans. Work with a builder to design plans and choose finishes for the new home.

3. Get cost estimates. The builder will estimate the total construction costs and draw schedule.

4. Apply for USDA construction loan. Work with your lender to get approved and close on the construction loan.

5. Begin construction. The builder can start digging and building once loan documents are signed.

6. Draws are released. As work is completed, the builder submits draw requests and loan funds are released in stages.

7. Final inspection. The home must pass a final inspection before the last draw is released.

8. Convert to permanent loan. Once construction is done, the construction loan converts to a traditional USDA mortgage.

It is a detailed process that relies heavily on close communication between all parties. Choosing an experienced lender and builder is key.

The Construction Loan Itself

The USDA construction loan product works similarly to other construction loans. Here are some key points:

• The loan is structured into multiple “draws” that are released as stages of construction are completed.

• Interest-only payments are made during the construction phase, keeping payments low during building.

• Once construction is finished, the loan converts to a traditional 30-year fixed rate USDA mortgage.

• Total loan amounts up to $548,250 (in most counties) are available based on your income, debts, and house plans.

• You pay a 1% USDA guarantee fee and ongoing annual mortgage insurance premium.

• The home must be your primary residence upon completion. Rental homes are not eligible.

Tips for USDA Construction Loans

If you plan to build a home using USDA financing, keep these tips in mind:

• Find an experienced USDA lender who can smoothly guide you through the process.

• Research and hire a licensed, approved home builder with a solid reputation.

• Understand the construction timelines and draw schedule before getting started.

• Get all permits, builder agreements, and inspections handled properly.

• Closely monitor construction progress and loan draw requests.

• Be prepared to make interest-only payments during the building phase.

• Allow plenty of time for the entire process, from land purchase through construction completion.

Alternatives to USDA Construction Loans

Although USDA loans allow for new construction in most cases, the program guidelines can be restrictive. Here are some alternative financing options to consider:

• FHA construction loan – More flexible options for buying land and construction.

• Conventional construction loan – Typically requires 10-20% downpayment.

• Owner-builder construction – You act as general contractor and subcontract work.

• Renovation loan – Finance purchase and rehab of an existing home.

• Personal loan – Use savings or a personal loan to purchase land, then get separate construction financing.

Talk to an experienced loan officer about the best way to finance building your dream home!

The Bottom Line

Yes, it is possible to use a USDA home loan to finance the construction of a new home in most cases. The keys are meeting eligibility requirements, finding experienced and approved builders/lenders, closely following guidelines, and allowing plenty of time to complete the process. With proper planning and execution, you can use a USDA loan to build your dream home.