Everything You Need to Know About USDA Construction Loan Requirements in 2023

Purchasing land and building a custom home can be an exciting and fulfilling experience. However, financing the construction of a new home can also be complicated and confusing. This is where USDA construction loans, offered by the United States Department of Agriculture (USDA), can help.

USDA construction loans allow buyers to finance the purchase of land and the construction of a new home through one convenient loan program. These government-backed loans make building a home in rural areas more affordable by offering low interest rates and requiring no down payment.

However, USDA construction loans do come with specific borrower, property, and contractor requirements that you need to be aware of before applying Meeting these requirements is key to qualifying for the program and smoothly financing your new custom build

In this comprehensive guide, I’ll walk through all the key eligibility and documentation requirements for USDA construction loans in 2023 so you can determine if this unique financing solution is right for your situation.

Overview of USDA Construction Loan Program

Before diving into the specific requirements, let’s first review the basics of the USDA construction loan program.

USDA construction loans, sometimes called USDA building loans, allow buyers to finance the purchase of land and construction of a new home in one loan through the USDA’s Single Family Housing Guaranteed Loan Program.

These loans are structured as construction-to-permanent mortgages. This means you only need to close on the mortgage once before construction begins. The loan will then convert to a permanent 30-year fixed-rate mortgage once construction is complete.

Some key benefits of USDA construction loans include:

• No down payment required – Borrowers can finance up to 100% of the land purchase and construction costs
• Low interest rates – Below market interest rates thanks to the USDA guarantee
• One loan – Construction financing and permanent mortgage wrapped into one loan

However, availability may be limited as these loans aren’t offered by every lender. The specific requirements below must also be met.

Borrower Requirements

As with all USDA home loans, borrowers must meet certain eligibility standards to qualify for a USDA construction loan. Here are the key borrower requirements to be aware of:

• Income limits – Your household income must be below the income limits set for your county. Limits are adjusted based on family size, with a max limit of $125,000 nationally.
• Credit score – Most lenders require a minimum credit score of 640. Some may go as low as 620.
• Debt-to-income ratio – Your total DTI typically can’t exceed 41%. Housing DTI alone can’t exceed 29% of gross monthly income.
• First-time homebuyer – You don’t have to be a first-time buyer, but the property must be your primary residence.
• History of bankruptcy – May need to wait 1-3 years after bankruptcy discharge to qualify, depending on the type.

Meeting these requirements ensures you can comfortably afford the new mortgage payment. Having a low debt load and healthy credit score is key.

Property Requirements

Along with borrower eligibility standards, the property itself must meet certain criteria to qualify for USDA construction financing:

• Location – Must be in a rural area designated as eligible by the USDA. You can check your address using the USDA’s eligibility tool.
• Primary residence – You must intend to use the home as your primary residence once construction is complete.
• Home size – The home generally can’t exceed 2,000 square feet, though some exceptions apply.
• Condos allowed – USDA loans can be used to construct some condominium units and manufactured homes.

Sticking within these property guidelines ensures the home aligns with the USDA program’s mission of promoting affordable rural housing.

Contractor Requirements

One unique requirement of USDA construction loans is that your builder must be approved by the lender. Here are the minimum criteria contractors must meet:

• 2 years of experience – Must have at least 2 years of experience successfully building single-family homes.
• Background check – Must pass the lender’s background check requirements.
• Credit check – Lenders will verify the contractor’s own credit history is satisfactory.
• $500k liability insurance – Must carry adequate insurance to cover potential liabilities.
• Licensed – Fully licensed for construction work in your state.

Vetting the builder carefully on the front end prevents issues during the construction process that could put your financing at risk. Be sure to find both an approved lender and contractor familiar with the program.

Application Documentation

When applying for a USDA construction loan, you’ll need to gather much of the same documentation required for a standard mortgage:

• Income verification (pay stubs, W-2s, tax returns)
• Detailed list of assets and liabilities
• Property appraisal and blueprints
• Credit report and background check authorization
• Contractor’s license, insurance, and other credentials

In addition, you’ll likely need to provide:

• Land purchase agreement
• Construction contract with detailed specifications and timeline
• Building permits and inspection information
• Any required condo or homeowner’s association documents

Proving you meet all the requirements upfront ensures quick processing and approval for your construction loan.

The Bottom Line

USDA construction loans provide a streamlined way to finance building a home in rural areas. If you’re looking to build, make sure you fully understand the specific borrower, property, and contractor requirements before applying.

Taking the time to confirm your eligibility and compile needed paperwork helps ensure quick approval so you can break ground on your dream home. Just be aware that not all lenders offer these specialized loans.