Everything You Need To Know About USDA One Time Close Loans

Buying land and building a home can be a complicated process involving multiple loans – a loan to purchase the land, a construction loan to finance building the home, and a mortgage loan to finance the finished home long-term. This can make for a lengthy and difficult homebuying journey. However, USDA one time close loans aim to simplify this process by combining land purchase, construction financing, and the permanent mortgage into a single loan product.

In this comprehensive guide, we will explain everything you need to know about USDA one time close loans, also commonly referred to as single close loans or combination construction-to-permanent loans.

What is a USDA One Time Close Loan?

A USDA one time close loan, offered through the USDA’s Single Family Housing Guaranteed Loan Program, allows borrowers to purchase land, finance construction of a new home, and obtain a permanent fixed-rate mortgage with one single loan and a single closing process Rather than having to apply for and close on multiple loans, a USDA one time close loan handles everything in one simplified transaction.

With a USDA one time close loan

You can purchase land and build a new single-family home, manufactured home, or eligible condominium with one loan
There is only one closing, saving you time and money on closing costs
You only have to go through the mortgage qualification and approval process once
You won’t have to make monthly payments during construction
The loan automatically converts to a permanent 30-year fixed rate mortgage once construction is complete

Benefits of a USDA One Time Close Loan

USDA one time close loans offer home buyers several attractive benefits:

Simplified Process

The ability to buy land, build, and finance the finished home with one single loan streamlines the often complicated process of construction financing. You only need to close on the loan once.

Cost Savings

With just one closing, you only have to pay closing costs and fees once. This saves money compared to paying those costs multiple times for separate loans.

Single Monthly Payment

Rather than juggle multiple loan payments, you have just one manageable monthly mortgage payment.

No Monthly Payments During Construction

You are not required to make loan payments while construction is in progress. Payments don’t begin until the home is completed.

No Down Payment Required

Like other USDA home loans, the one time close loan requires no down payment for eligible borrowers. This makes financing the construction and purchase of a new home more affordable.

Lower Interest Rates

Interest rates on USDA loans are typically below market rates, making these loans more budget-friendly.

Drawbacks of a USDA One Time Close Loan

While very beneficial, USDA one time close loans do come with a few potential drawbacks to be aware of:

Harder to Find

Very few lenders offer USDA one time close loans. You may have to do quite a bit of searching to find a lender who provides this product.

Lengthy Process

With construction involved, closing on a USDA one time close loan takes longer than a typical mortgage – often 60 days or more. It requires patience.

Higher Rates Than Typical USDA Loans

Because it combines construction financing with a permanent mortgage, interest rates on the one time close loan tend to be higher than a traditional USDA purchase or refinance loan.

Upfront Guarantee Fee

USDA charges an upfront guarantee fee, rolled into the loan amount, equal to 1% of the loan total.

Annual Fee

You will pay an annual fee equal to 0.35% of the loan balance each year, divided into 12 monthly installments.

USDA One Time Close Loan Requirements

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

Borrower Requirements

Credit score of at least 640
Debt-to-income ratio below 41%
No bankruptcy in past 2 years
Meet USDA income limits for area median income
Clean credit history with no late payments

Property Requirements

Located in eligible rural area
Will be your primary residence
Single-family home, manufactured home, or eligible condo

Contractor Requirements

Minimum 2 years construction experience
Full licensing
At least $500,000 liability insurance
Clean background check
Good credit history

Meeting all these requirements can be challenging, which is why USDA one time close loans are difficult to obtain. But they offer significant benefits if you can qualify.

How USDA One Time Close Loans Work

Here is a step-by-step overview of the process to get a USDA one time close loan:

1. Find an Eligible Property

Search for land to purchase in a rural area eligible for USDA financing. If you already own land, it can be included.

2. Select a USDA-Approved Builder

Find a contractor with proper licensing, insurance, and experience who will construct your home. They must meet USDA criteria.

3. Apply for Loan Pre-Approval

Work with a USDA lender to submit your application and documentation to get pre-approved for financing.

4. Close on Your Loan

Once pre-approved, close on the USDA one time close loan. The lender will disburse funds to purchase the land and finance construction.

5. Build Your Home

With financing in place, your contractor can now start construction on your new home.

6. Make Payments Once Complete

When construction is finished, the loan converts to a permanent mortgage and you begin making monthly principal and interest payments.

Alternatives to USDA One Time Close Loans

Because USDA one time close loans can be difficult to obtain, you may want to consider alternatives that provide combined construction and permanent financing:

FHA One Time Close Construction Loans – Insured by the Federal Housing Administration, these require just 3.5% down and have flexible credit guidelines.
VA One Time Close Construction Loans – Offered by the Department of Veterans Affairs, these feature no down payment for eligible veterans and service members.
Conventional One Time Close Construction Loans – Provided by private lenders, these typically require higher credit scores and down payments of around 5-10%.
FHA 203(k) Loans – Allow buyers to finance purchase and renovation of a fixer-upper with one FHA-insured mortgage.
Traditional USDA Loans – Don’t provide combined financing, but allow separate purchase and construction loans in eligible rural areas.

Carefully comparing all your options will help you identify the best loan for your unique home buying situation.

Finding the Best USDA One Time Close Loan Lender

Very few lenders offer USDA one time close loans, so finding one can take effort. Here are some tips for finding the best lender:

Search online for “USDA one time close lenders”
Ask contacts who have built with USDA financing for referrals
Look for lenders familiar with rural and construction lending
Compare interest rates and fees from multiple lenders
Ask about their experience with USDA one time close loans specifically
Read reviews from past USDA borrowers

Taking the time to find an experienced, reputable lender you trust is key to a smooth process.

USDA One Time Close Loan Interest Rates

Interest rates on USDA one time close loans tend to be higher than typical mortgage rates. Rates can vary significantly between lenders. Here are some current general guidelines:

Rates for 30-year fixed-rate USDA one time close loans range from 5.25% to 7.25%
Rates for 15-year fixed-rate USDA one time close loans range from 4.75% to 6.75%
Actual rate offered will depend on your credit score, debt-to-income ratio, loan amount, and lender
Compare rates from multiple lenders to find the best deal
Look for opportunities to buy down the rate by paying discount points upfront

Higher rates make shopping around essential to keep your loan as affordable as possible.

The Bottom Line

USDA one time close loans provide a simplified way to buy land, build a home, and finance the finished property with one single loan. This can greatly streamline the construction financing process. However, higher rates and stringent eligibility requirements mean they aren’t the right option for everyone. Carefully comparing this loan to alternatives like FHA, VA, and conventional construction loans allows you to make the optimal choice based on your financial situation and homeownership goals. Partnering with an experienced lender familiar with the USDA one time close loan process is key to avoiding hassles and delays. While not easy to obtain, for the right borrower a USDA one time close loan can be an affordable path to achieving your dream of building your own custom home.

What are the benefits?

With the USDA OTC loan, borrowers can secure financing for the purchase of the land, the construction and the home’s permanent mortgage in a single closing. Only one closing means only one set of closing costs, helping save money. It also allows the process to move forward without interruption from potential snags in financing other aspects later on.

The USDA OTC loan’s maximum loan-to-value (LTV) ratio is up to 100%. This gives borrowers the freedom to close on the loan with 0% down

The USDA OTC loan product is available to any borrower who meets the minimum qualifying criteria. This includes first time and repeat buyers. Here are the basic requirements for USDA OTC loan approval:

Borrower must have contracted with a builder (must be licensed general contractor)
Borrower must be purchasing the land at closing, or currently own their property
At closing, after funds are disbursed to cover the purchase of the land, the balance of the mortgage proceeds must be placed in an escrow account to be disbursed as construction progresses
Amortization of the permanent mortgage must begin no later than the first of the month following 60 days from the date of the final inspection or issuance of the Certificate of Occupancy
Maximum loan amounts will vary by location
Minimum FICO of 640

USDA One-Time Close Construction – The Basics

Designed to simplify the financing process for homebuyers, eliminating the need to obtain both a construction loan and permanent mortgage
Up to 100% Maximum LTV
For Construction-to-Permanent, closing occurs before construction begins
No payments due during the construction phase
Closing costs may be financed
30-year fully amortizing fixed
No re-qualification once construction is complete
A single closing reduces closing costs, saving your borrowers money

Pros and Cons of a USDA Loan | All You Need to Know About USDA Home Loans EXPLAINED

FAQ

What are the qualifications for a USDA loan in Texas?

In order to meet the income qualifications, you must make less than 15% above the average income for the area. You must also be able to demonstrate that you have stable income and employment. A credit score of 640 will be required by most lenders, and your debt-to-income ratio should be below 41%.

Are USDA loans worth it?

Along with no need for a down payment, USDA loans have another advantage: You could qualify for a low, fixed interest rate if you have low income. Some drawbacks, though, are that the property must be located in a USDA-approved area, and borrowers cannot exceed income limits.

Is USDA better than FHA?

USDA loans are ideal for borrowers with lower incomes who want to buy in rural areas. FHA loans are often ideal for borrowers who have a small down payment saved and credit scores that aren’t high enough to get a low interest rate on a conventional mortgage.

What does a USDA underwriter look for?

The Guaranteed Underwriting System (GUS) is a platform used by the USDA to streamline the underwriting and approval process for USDA loans. GUS is an automated underwriting system that assesses a borrower’s creditworthiness, income eligibility and property eligibility based on USDA guidelines and criteria.

What is a USDA Rural Development Loan?

It could be the ideal loan to cover all you’re seeking. With just one application and closing, you can secure a loan through the USDA Rural Development Loan program to finance both the land, construction, and long-term mortgage of your home.

Does a USDA construction loan require a down payment?

The USDA construction loan offers up to 100% financing, meaning qualifying borrowers don’t have to make a down payment for this type of loan.

What is a one-time close loan?

Conventional, FHA, and VA One-Time Close loans are options for borrowers looking to build a new home. The Federal Housing Administration backs FHA loans and offers low down payment options for borrowers with lower credit scores.

What is the difference between a construction loan and a USDA loan?

A USDA loan allows a borrower to buy an existing home, while a USDA construction loan allows borrowers to finance a home build. The USDA has simplified the financing process for home builds through its Single-Family Housing Guaranteed Loan Program, which offers construction-to-permanent loans.