Everything You Need To Know About USDA One-Time Close Loans

The USDA one-time close loan program allows eligible homebuyers to purchase land and construct a new home on it with a single mortgage loan This streamlined process eliminates the hassle of obtaining separate financing and can make attaining homeownership more accessible

As a government-backed mortgage option targeted at rural communities, USDA one-time close loans have unique benefits and requirements. Understanding how they work is key to determining if this route makes sense for your home buying goals.

In this comprehensive guide, we’ll explore what exactly USDA one-time close loans are, their pros and cons, eligibility criteria, and steps to getting approved Read on for everything you need to know about these specialized mortgages.

What Is A USDA One-Time Close Loan?

USDA one-time close loans also called single close or all-in-one loans allow borrowers to roll the purchase of land, construction of a home, and permanent end mortgage into a single loan product. This eliminates the need for separate financing arrangements at each step.

They are backed by the U.S. Department of Agriculture (USDA) through its Single Family Housing Guaranteed Loan Program. The USDA provides guarantees to approved lenders, enabling them to fund qualified buyers looking to build homes in rural locations.

With a USDA one-time close loan:

• You can buy land and build a house with one mortgage
• There is just one closing, so lower upfront costs
• You only have to qualify once for the entire loan
• Payments are structured into a single monthly amount

These features streamline what can otherwise be a complex process. You avoid the hassle of securing financing multiple times for the different phases of the project.

What Expenses Are Covered?

USDA one-time close loans provide financing for purchasing land as well as constructing and ultimately owning your new home.

Here are some common expenses covered:

• Buying the lot or land
• Reasonable construction administrative costs
• Contingency reserves
• Inspection fees
• Builder’s risk insurance
• Landscaping
• Other authorized construction expenses

Any leftover funds after building must go directly toward your principal mortgage balance.

USDA One-Time Close Loan Requirements

While convenient, USDA one-time close loans aren’t available to just anyone. Strict criteria regarding the property location and borrower qualifications apply.

Location Requirements

The home must be built in an eligible rural area as designated by the USDA. Conditions defining rural include:

• Open country
• Communities with populations under 35,000
• Small towns and cities between 10,000-35,000 in population that are not part of an urban area

Your lender will verify your property’s location qualifies.

Borrower Requirements

To qualify for a USDA one-time close loan, you must meet certain credit, income, and other guidelines:

• Credit score of 640 or higher
• Total debt-to-income ratio below 41%
• No bankruptcy in past 2 years
• Income within USDA limits for your county and household size
• Clean credit history with no gaps, forbearances, or late payments
• Sufficient income documentation with no unexplainable deposits

Meeting stringent underwriting standards is key to getting approved with minimal headaches.

Construction Requirements

Specific criteria regarding the home construction also apply:

• Your builder must be USDA-approved
• The home must be your primary residence
• Construction must adhere to all regulatory standards
• The builder provides a new home warranty

Adhering to these parameters ensures the process goes smoothly from start to finish.

The Pros And Cons of USDA One-Time Close Loans

Weighing the advantages and potential drawbacks of USDA one-time close loans is important in determining if this path is right for you.

Pros

• Simplified process with one loan, closing, and monthly payment
• Reduced upfront costs since you only pay closing costs once
• No down payment required
• Below-market interest rates
• Available to moderate and low-income borrowers

Cons

• Limited availability, can be difficult to find a participating lender
• Strict eligibility requirements
• Higher rates than conventional loans
• Lengthy approval process
• Must build in qualified rural location
• Construction delays can increase costs

As with any loan, there are tradeoffs to consider. But for the right borrower, a USDA one-time close loan can be an attractive option.

Interest Rates On USDA One-Time Close Loans

Interest rates on USDA one-time close loans tend to run higher than rates for conventional mortgages. This pricing accounts for the increased risk lenders take on with these specialized products.

Rates can vary significantly between lenders as well. It pays to shop around for the most competitive deal. Expect rates around 0.5 to 1 percentage point above conventional mortgage rates.

Once construction is complete and you make six on-time payments, it may be possible to refinance into a lower rate. Your loan officer can advise you on potential refinancing options.

How To Apply For A USDA One-Time Close Loan

Follow these key steps when navigating the USDA one-time close loan process:

1. Find a qualified lender

Not all lenders offer USDA one-time close loans. Search specifically for “USDA lenders” or “USDA one-time close lenders”. Ask prospective lenders about their experience with these loans.

2. Select a USDA-approved builder

Your lender will only approve builders who meet USDA requirements regarding licensing, insurance, experience, and more.

3. Submit loan application and documentation

Be ready to provide extensive paperwork proving your creditworthiness, income, and eligibility. This includes pay stubs, tax returns, credit reports, and letters of explanation as needed.

4. Order appraisal and finalize loan approval

Once preliminary approval is obtained, an appraisal will be ordered to establish the property’s value. After that, you can move to closing and lock in your interest rate.

5. Complete construction

Now the real work begins! Stay organized and keep your loan officer updated on progress to help the process go smoothly.

6. Make conversion to permanent loan

After at least six on-time payments once construction is finished, your loan converts to a traditional fixed rate mortgage and you begin building equity.

While it involves effort, a USDA one-time close loan can simplify the path to your dream home. Weigh the options to see if it’s right for you!

Alternatives To USDA One-Time Close Loans

If you have trouble finding a USDA one-time close lender, or want to compare options, here are some alternatives to consider:

FHA One-Time Close Loan

• Backed by Federal Housing Administration
• Only 3.5% down payment required
• More lenient credit score requirements

VA One-Time Close Loan

• Special program for veterans/military members
• Zero down payment options
• Must have VA home loan eligibility

Conventional Construction Loans

• Typically need 10-20% down payment
• Credit scores starting at 620
• No geographic restrictions

FHA 203(k) Rehab Loan

• Finance purchase + renovations
• Minimum 3.5% down payment
• Lower credit scores accepted

USDA Traditional Loan

• Separate purchase/construction loans
• 100% financing available
• For moderate income borrowers

Explore all avenues to find the optimal loan for your unique situation.

FAQs About USDA One-Time Close Loans

Can I buy land with a USDA one-time close loan?

Yes, these loans finance both the land purchase and construction. The land must be in an eligible rural location.

Do I need a down payment?

No, USDA one-time close loans offer up to 100% financing for qualified borrowers. No down payment is required.

What credit score is needed?

A minimum credit score of 640 is typically required. The higher your score, the better your chance of approval.

How long does the process take?

Expect at least 60+ days for approval, followed by the months-long construction period. Have patience!

Can I get cash back at closing?

No, you cannot receive cash back with a USDA loan. Leftover funds must be applied to your mortgage principal.

Who is eligible?

Borrowers with moderate incomes who meet credit, income, and geographic requirements. Income limits vary by region.

Are USDA loans just for first-time buyers?

No! USDA loans are available to both first-time and repeat buyers who meet eligibility criteria.

Who are approved lenders?

You need a lender who participates in USDA’s Single Family Housing Guaranteed Loan Program. Search for “USDA lenders” to find options.

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