Build Your Dream Home with a USDA Loan for New Construction

Buying land and building a custom home can be an exciting prospect for many prospective homeowners Though it may seem daunting, the right financing can make the process smooth and affordable This is where USDA loans for new construction come in.

USDA stands for the United States Department of Agriculture Through their Single Family Housing Guaranteed Loan Program, the USDA provides financing options to help rural residents achieve homeownership One such option is their new construction loan program.

In this article, we’ll explore what USDA loans for new construction are, who’s eligible, and how the process works from start to finish. We’ll also look at the pros and cons so you can determine if it’s the right choice for your new build.

What is a USDA Loan for New Construction?

A USDA new construction loan is a mortgage that lets you buy land and build a home in one fell swoop. With a traditional construction loan, you’d need to get separate financing for the land purchase and construction.

The USDA option combines these into a convenient one-time close loan. It provides the financing to:

• Purchase the lot or land
• Pay for construction costs to build your home
• Provide a permanent mortgage once construction is complete

So you end up with just one loan and one monthly payment. There’s no need to shop for and close on multiple loans.

USDA New Construction Loan Requirements

To qualify for a USDA new construction loan, certain borrower and property requirements must be met.

Borrower Requirements

For the borrower, you’ll need:

• A minimum credit score of 640
• A debt-to-income ratio below 41%
• Sufficient income to meet USDA limits for your area
• No bankruptcy in the past 2 years
• At least 2 years of reliable income and employment history

Your lender will also want to see that you have solid credit with no missed payments or other red flags.

Property Requirements

As for the property, USDA new construction loans can only be used to build:

• Single family homes
• Modular homes
• Condos

The home must be in a USDA-designated rural area. Second homes, investment properties, and commercial buildings are ineligible.

You also need to use a USDA-approved contractor with proper licensing and insurance. And the home must comply with all zoning and building codes.

Pros and Cons of USDA New Construction Loans

Let’s look at some of the biggest advantages and drawbacks of choosing a USDA loan for your new build.

Pros

• One loan for everything – No need for separate land, construction, and mortgage loans
• Low or no down payment – 100% financing means no down payment is required
• Lower payments – Interest-only payments during construction keep payments affordable
• Good option for lower incomes – Income limits are higher than conventional loans

Cons

• Limited availability – Can be difficult to find a lender offering USDA new construction loans
• Strict requirements – Both property and borrower must meet guidelines to qualify
• Rural locations only – Home can only be built in an eligible rural area
• Higher rates – Interest rates may be higher than a conventional mortgage

While they have limitations, USDA new construction loans can be a great choice for the right borrower.

USDA New Construction Loan Rates

Interest rates on USDA new construction loans tend to be a little higher than rates on conventional mortgages. This is because they’re backed by the government rather than private lenders.

Rates can vary quite a bit between lenders. It’s important to shop around for the best deal. Here are some average USDA new construction loan rates:

• 30-year fixed rate: 5.5% – 6.5%
• 15-year fixed rate: 4.75% – 5.75%

The interest rate will be locked in once construction begins. This protects you from any rate increases during the build.

How to Apply for a USDA New Construction Loan

If you want to apply for a USDA new construction loan, follow these steps:

1. Find a qualified lender

Not all lenders offer USDA construction loans. Search online or ask around to find one with experience with this program.

2. Choose a USDA-approved contractor

Your lender will verify the contractor meets all requirements. Get bids from a few different builders.

3. Submit loan application and documents

You’ll need to provide documents that verify your income, employment, assets, debts, and credit history.

4. Get land appraisal and estimates

The lender will appraise the land value and evaluate the construction estimates.

5. Close on the loan and start building

At closing, you’ll sign the deed and loan documents. Then construction can begin on your new home!

The process takes about 60-90 days from application to closing. You’ll need patience as there are many steps involved.

Alternatives to USDA New Construction Loans

If you don’t qualify for a USDA new construction loan or want to consider other options, here are a few alternatives:

• FHA construction loan – Requires just 3.5% down payment and has flexible credit requirements

• VA construction loan – No down payment for veterans; can finance 100% of the construction costs

• Conventional construction loan – Typically requires at least 10-20% down payment

• Renovation loans – FHA 203(k) and HomeStyle loans allow you to finance purchase plus renovations

Shop around with a few lenders to see which loan programs you may qualify for. Compare rates and terms to choose the most suitable option.

FAQs About USDA Loans for New Construction

Can I use a USDA loan to build on land I already own?

Yes, you can build on land you already own, as long as it meets the location and other requirements. The land value will be appraised and incorporated into the USDA new construction loan.

What are the income limits for USDA loans?

Income limits are based on the median income in your county and adjust by household size. In general, your income must be below 115% of the median income for your area.

How soon can I refinance my USDA construction loan?

Most lenders require you to wait 6-12 months after the home is completed before refinancing into a standard USDA mortgage.

Are there closing costs with a USDA new construction loan?

Yes, you will have to pay closing costs of around 2-5% of the total loan amount. The USDA does not provide grants or down payment assistance programs.

Can I act as my own contractor?

No, you must use a contractor approved by both the USDA and your lender. You cannot act as the contractor yourself.

Build Your Dream Home

If you want to build a home in a rural location, a USDA new construction loan offers an affordable financing option with no down payment required. Just be sure to find an approved lender, contractor, and property to meet all the requirements. With the right prep work, you’ll be well on your way to turning your home building dreams into reality!