Can You Get a USDA Loan to Build a House?

The United States Department of Agriculture (USDA) offers home loans to help those living in rural areas obtain affordable housing One type of USDA loan allows borrowers to finance the construction of a new home through what is known as a USDA construction loan.

What is a USDA Construction Loan?

A USDA construction loan, also called a USDA building loan, combines the financing for the land purchase, construction costs, and permanent mortgage into a single loan product This streamlines the process so you only need one loan and one set of closing costs rather than separate loans for each stage

With a USDA construction loan:

• You can buy land and build a house from the ground up.
• The loan covers purchasing the lot, construction costs, contingencies, fees, and other eligible expenses.
• Once construction is complete, the loan converts to a traditional long-term USDA mortgage.

Essentially, a USDA construction loan finances everything from start to finish so you can build and move into your custom home.

USDA Construction Loan Requirements

USDA loans have eligibility requirements for borrowers, properties, and builders. You must meet certain criteria to qualify for a USDA construction loan:

• Credit score – Typically 640 minimum

• Debt-to-income ratio – Generally 41% or less

• Income limits – Varies by location, based on median income

• Location – Must be in an eligible rural area

• Property type – Site-built single family homes, some condos and manufactured homes

• Primary residence – You must live in the home as your primary residence

• Builder – Must be USDA-approved

• Warranty – Builder must provide a new home warranty

The property must be located in an eligible rural area as designated by the USDA. You’ll also need to use a USDA-approved contractor with at least 2 years of experience and proper licensing and insurance.

Benefits of USDA Construction Loans

USDA construction loans offer several advantages:

• One loan – Construction and permanent financing combined

• Single closing – Lower closing costs

• No down payment – 100% financing available

• One application – Simpler qualification process

• No payments during construction – Pay only once home is complete

• Fixed interest rate – Rate is locked in upfront

By rolling everything into one convenient loan, the USDA construction loan simplifies the process of building and financing your home.

How to Apply for a USDA Construction Loan

Follow these steps to get a USDA construction loan:

1. Find an eligible property – The land must be in a USDA-approved rural location.

2. Select a USDA-approved builder – They must meet experience, licensing, and insurance requirements.

3. Get prequalified – Confirm you meet debt-to-income, credit, and income limits.

4. Submit loan application – Provide all required documentation.

5. Secure financing – The lender will underwrite and approve the construction loan.

6. Close on the loan – This provides the financing to start construction.

7. Make draws during construction – The lender disburses payments to the builder in installments.

8. Construction completes – The home is built and ready to occupy.

9. Loan converts to permanent mortgage – You begin making regular principal and interest payments.

Work with a USDA-approved lender to navigate the application process.

Alternatives to USDA Construction Loans

If you don’t qualify for a USDA loan, here are some other options for financing construction of a new home:

• FHA construction loan – Insured by the Federal Housing Administration

• VA construction loan – Backed by the Department of Veterans Affairs

• Conventional construction loan – Offered by private lenders

• Owner-builder construction loan – Allows you to act as your own general contractor

• Renovation loan – Converts an existing home using a 203(k) or HomeStyle Renovation Mortgage

Shop around with different lenders to find the most affordable construction loan or renovation program for your situation.

The Bottom Line

USDA construction loans allow you to build a house from the ground up, rolling the financing for land, construction, and a permanent mortgage into one loan. This simplified process helps make owning a custom-built home accessible and affordable for many living in rural locations who meet USDA eligibility guidelines.

While USDA construction loans offer distinct advantages like no down payment and a single closing, make sure to also consider alternatives like FHA, VA, conventional, and renovation loans. Talk to a knowledgeable loan officer to determine the optimal loan program for purchasing land and financing construction of your dream home.