Everything You Need to Know About USDA One Time Close Construction Loans

A USDA one time close construction loan allows you to buy land, build a home, and secure permanent financing all with one loan. This can greatly simplify the process of becoming a homeowner.

With a traditional construction loan you’d need separate loans for the land purchase, construction, and long-term mortgage. But the USDA one time close loan combines all three stages into a single loan product.

While these loans offer big benefits they also come with restrictions that limit their availability. In this complete guide we’ll cover

• What is a USDA one time close construction loan?
• How does the process work?
• What are the requirements and eligibility?
• What are the pros and cons?
• What are the interest rates and fees?
• How hard is it to find lenders offering these loans?
• Are there alternatives worth considering?

What Exactly is a USDA One Time Close Construction Loan?

The USDA one time close construction loan is backed by the U.S Department of Agriculture It allows borrowers to buy land, build a new home, and obtain permanent financing with just one loan and a single closing.

With this loan program, you can:

• Purchase the lot or land
• Pay for construction costs to build the home
• Convert the construction loan into a long-term USDA mortgage once building is complete

Since it combines three major steps into one loan, the USDA one time close construction loan goes by other names:

• Single close construction loan
• All-in-one construction loan
• Combination construction-to-permanent loan

This loan is ideal if you want to build a home from the ground up but want simplified financing.

How Does the USDA One Time Close Construction Loan Process Work?

Here’s an overview of how this unique construction loan program works:

1. Find land to purchase

The first step is identifying a vacant lot or parcel of land to buy in a USDA-eligible rural area. The land purchase will be rolled into your USDA loan.

2. Select a USDA-approved builder

You’ll need to find a builder approved by the USDA who meets all the program requirements. They should have at least 2 years of home building experience.

3. Apply for the USDA construction loan

Work with a USDA-approved lender to apply and get approved for the one time close construction loan. You’ll go through underwriting based on factors like your income, assets, credit score, and debt-to-income ratio.

4. Close on the loan to buy the land

At closing, the land purchase will be covered by the loan. Closing costs and upfront USDA fees will also be due.

5. Construction period

Your builder will start construction on your new home, overseen by the lender. You won’t need to make monthly mortgage payments yet.

6. Conversion to USDA mortgage

Once construction is complete, the loan automatically converts to a fixed-rate USDA mortgage and you’ll begin making principal and interest payments.

The single closing simplifies the process. You only go through underwriting once, pay closing costs once, and have one set of loan qualifications.

USDA One Time Close Construction Loan Requirements

To qualify for a USDA one time close construction loan, you must meet requirements related to your finances, credit, and the property location.

Borrower Requirements

As the borrower, you must:

• Have a minimum 640 credit score
• Have a debt-to-income ratio below 41%
• Have stable income that doesn’t exceed USDA income limits
• Have no bankruptcies or foreclosures in the past 3 years
• Have at least 12 months of clean credit history
• Have adequate savings and reserves

You’ll also need to provide extensive documentation to prove you meet these requirements. Expect to provide pay stubs, tax returns, bank statements, and more.

Property and Land Requirements

The land and property have their own set of eligibility rules, including:

• The property must be located in a USDA-designated rural area
• The home must be your primary residence, not a vacation or rental property
• Manufactured homes are eligible, but not modular or mobile homes
• The property must be residential and single-family

The USDA has additional requirements related to construction quality, warranties, home inspections, and more. Your lender will outline all requirements.

Builder/Contractor Requirements

Your builder must be approved by the USDA lender and meet requirements such as:

• Having 2+ years of home building experience
• Carrying proper insurance
• Maintaining required licenses
• Passing background checks
• Having a minimum credit score

The Pros and Cons of USDA One Time Close Construction Loans

This unique loan program offers some nice perks. But there are also downsides to weigh.

Advantages of USDA One Time Close Construction Loans

• One loan, closing, and set of costs: You skip multiple loan applications and closings
• No down payment required: 100% financing means you can build a home with no down payment
• Below-market interest rates: USDA loans typically have competitive rates
• Affordable payments: Interest rates, insurance, and fees are subsidized
• Construction costs covered: The loan pays for land, building, and permanent financing

Disadvantages of USDA One Time Close Construction Loans

• Tough to find lenders: Very few lenders offer USDA construction loans
• Strict requirements: Both you and the property must meet rigid criteria
• Long wait times: Construction delays prolong the process to get your permanent mortgage
• Potentially higher rates: Rates may be 0.25 to 0.5% higher than normal USDA loans
• Upfront guarantee fee: You pay 1% of the loan amount in fees at closing

In addition to considering the pros and cons, you should shop around to see if other construction loans may better suit your needs.

Interest Rates on USDA One Time Close Construction Loans

The interest rate on your USDA construction loan will be set when your loan closes. This initial rate during the construction phase may be higher than rates on standard USDA mortgages.

According to the USDA, lenders may charge .25 to .5% higher rates due to the increased complexity and risk associated with construction loans.

Once construction is finished, the loan converts to a traditional fixed-rate mortgage. At this point, after making 6 payments, you may be able to refinance via a USDA Streamline Refinance to lower your rate.

When comparing rates, look at both:

• The construction loan rate
• The rate on the permanent USDA mortgage

Ask lenders if they offer a rate lock to protect you from rate hikes during construction. Shop around to find the lender offering the best deal on both phases.

Fees Charged on USDA One Time Close Construction Loans

You’ll pay various fees when you obtain a USDA one time close construction loan. Here are the main costs to expect:

Upfront guarantee fee – This fee is 1% of the loan amount and due at closing. On a $300,000 loan, you would pay a $3,000 upfront fee as compensation for the USDA guarantee.

Annual fee – An annual fee of 0.35% of the loan balance is charged. On a $300,000 mortgage, this equals $1,050 per year or about $88 per month.

Closing costs – You’ll pay typical closing costs like lender origination fees, title fees, appraisal fees, and more. Closing costs range from 2-5% of the total loan amount.

Interest costs – The interest rate you qualify for determines your monthly interest costs. Get quotes from multiple lenders to find the best construction loan rate.

Inspection fees – The lender may charge inspection fees to oversee the construction progress. Talk to your lender about these costs.

Make sure you understand all possible fees when evaluating the affordability of a USDA construction loan.

The Availability of USDA One Time Close Construction Loans

The biggest challenge with USDA one time close construction loans is finding a lender who offers them. These loans are few and far between.

According to the USDA, hundreds of lenders participate in the normal USDA home loan program. But only a small fraction provide USDA construction financing.

Even large national lenders shy away from these loans. Small local or regional lenders are more likely to offer them.

If having construction costs rolled into your mortgage is important to you, call lenders and explicitly ask if they provide USDA one time close construction loans. Be prepared to cast a wide net in your search.

Alternatives to Explore Besides USDA Construction Loans

If you strike out finding a USDA one time close construction loan, there are a few other options that let you bundle construction financing:

FHA One-Time Close – This loan from the Federal Housing Administration provides up to 96.5% financing. It