Purchasing land and building a new home can be an exciting yet complicated process. That’s why the USDA offers special one-time close loans to help make things easier for potential rural homeowners. In this comprehensive guide, we’ll explore everything you need to know about USDA one-time close loans, from eligibility requirements to application tips.
What is a USDA One-Time Close Loan?
A USDA one-time close loan bundles two major steps of the homebuying process into a single loan closing. Instead of needing separate loans for land purchase and home construction, you can get approved and close on financing for both the land and house build in one fell swoop.
This consolidated approach streamlines the lending process. You only need to apply get approved and close on the loan once rather than repeating these steps for two separate loans. It can save you time, effort, and paperwork.
Specifically, USDA one-time close loans bring together:
- Land purchase loan
- Construction loan
Into a straightforward, unified financing package offered through the USDA’s Single Family Housing Direct Home Loans program.
Top Benefits of One-Time Close USDA Loans
Why consider a one-time close construction-to-permanent home loan from the USDA? Here are some of the top perks:
Simplified lending process – Complete your land purchase and arrange construction financing in one loan rather than two separate transactions. Avoid duplicate paperwork and loan processes.
Potentially lower costs – Pay lower origination fees and closing costs by only needing one loan instead of two, May also get a lower interest rate by consolidating into a single loan,
Quicker construction – Start building faster since you’ll already have financing lined up for both land and construction costs. No need to finalize two loans before breaking ground.
Easier qualification – Get approved for the full loan amount upfront rather than re-qualifying later for a separate construction loan.
One low monthly payment – Have a single monthly payment for the combined loan rather than separate payments for land and construction loans. Can make budgeting easier.
Long-term flexibility – If needed, convert to a permanent loan after construction with the same lender. No need to shop for long-term financing post-build.
For eligible borrowers, a USDA one-time close loan can simplify and expedite the path to rural homeownership.
USDA Loan Eligibility Requirements
To qualify for a USDA one-time close construction loan, you must meet certain eligibility standards:
Income limits – Your household income must be below the limit set for your area. Check your county’s income eligibility on the USDA website.
Home location – The home you want to build must be in an eligible rural area as designated by the USDA Rural Development department.
Creditworthiness – You’ll need a minimum credit score of 640 along with a proven ability and willingness to repay debts.
Down payment – No down payment is required for USDA loans. However, you must be able to cover all upfront costs like escrow, appraisal, and loan fees.
Homebuyer education – First-time homeowners must complete an approved homebuyer education course before closing.
Prior USDA loan – If you currently have an outstanding USDA direct home loan, you may not be eligible for another until your current loan is paid off.
Citizenship – At least one borrower must be a U.S. citizen, U.S. noncitizen national, or Qualified Alien.
Meeting the income and location requirements are key to getting USDA approval. Their loans are designed specifically to help low-to-moderate income households in rural communities purchase affordable homes.
How To Apply for a One-Time Close USDA Loan
If you meet the eligibility criteria, follow these steps to apply for a USDA one-time close home loan:
1. Find a USDA lender – These specialized loans are only available through USDA-approved lenders rather than conventional mortgage lenders. Search the USDA Lender List to find options in your state.
2. Choose property and house plans – Decide on the rural property you want to purchase and work with a builder to design floor plans for your new home.
3. Ask the seller for a purchase contract contingency – Make your property purchase agreement contingent on getting approved USDA financing so you can back out if loan denied.
4. Apply with a lender – Work with your selected USDA lender to complete the mortgage application and provide required documentation to verify income, assets, and eligibility.
5. Get appraisal and environmental review – The property will be appraised to ensure its value supports the purchase price. The land will also be reviewed to ensure no environmental hazards.
6. Receive loan decision – After assessing your eligibility, credit, debt ratios, property value, etc. the lender will make a preliminary loan decision within 30 days.
7. Finalize loan approval – Provide any other needed documentation, complete the homebuyer education course if applicable, and accept the final loan offer.
8. Close on land and construction financing – Attend the closing to finalize land purchase and access construction loan funds. Then start building your dream home!
With preparation and persistence, the process can lead to getting an affordable all-in-one mortgage solution from the USDA.
What Can You Build with a One-Time Close Loan?
USDA one-time close loans allow for flexibility in what type of home you construct, including:
- Single family homes
- Double, triple, or quad homes
- Manufactured/modular homes
- Stick-built residences
- On-frame modular construction
You can build a home that suits your family’s size and needs on the rural property you purchase. Just provide house plans and details upfront when applying for the consolidated land acquisition and construction loan.
Home requirements include:
- Minimum 600 square feet of living space
- Permanent foundation
- All-weather access road
- Working septic or sewer system
Work with a reputable builder experienced with rural development projects to design plans that adhere to any applicable zoning laws and USDA home requirements.
Finding the Best USDA Construction Loan Rates
USDA home loans offer competitive interest rates, but actual percentages vary by lender. The USDA guarantees the loans, but approved private lenders provide the financing and set rates.
Current USDA-published maximum interest rates are:
- 3.625% for 30-year fixed
- 2.875% for 30-year fixed with upfront guarantee fee
However, lenders can offer lower rates based on market conditions. Shopping around helps find the best deal. Comparing total origination fees and closing costs between lenders is also wise.
Ask potential lenders:
- What are your current USDA construction loan rates and APRs?
- What origination/guarantee fees do you charge?
- Approximately how much are total closing costs?
Finding the right lender match can lead to maximum savings on your one-time close mortgage for land and construction.
Next Steps After Closing on Your USDA Loan
Once you purchase the land and lock in construction financing, it’s time to build! But keep the following next steps in mind:
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Break ground ASAP – Must begin construction within 6 months of closing unless an extension is obtained. Don’t risk loan cancellation by delaying.
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Make interest-only payments – Only interest accrues during the construction phase. Payments don’t apply to principal loan balance until build is complete.
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Provide progress inspections – USDA will periodically inspect construction to ensure work aligns with approved plans.
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Request draw payments – Submit draw requests to receive up to 5 installments of loan funds as you reach construction milestones.
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Convert to permanent loan – After construction, USDA loans automatically convert to affordable fixed-rate permanent mortgages.
With careful planning and compliance, your one-time close loan can smoothly pave the way from vacant land to finished home.
Is a One-Time Close USDA Loan Right for You?
While these consolidated loans simplify rural home financing, weigh the pros and cons before deciding if it’s the best choice:
Pros
- One loan, one closing
- Lower costs
- Faster timeline
- Easier to qualify
- Guaranteed affordable rates
Cons
- Must use USDA approved lender
- Limited to rural locations
- Home size and style restrictions
- Income and credit requirements
- Construction deadlines
Analyze your specific homebuying goals and financial situation to determine if a USDA one-time close loan is the right fit.
For eligible borrowers, combining land acquisition and construction into one USDA-backed loan can ease the path to building your own rural retreat. Use this guide to explore the loan process from start to finish!
What is the USDA One-Time Close Construction Loan?
The USDA One-Time Close (OTC) Construction loan is a product that allows borrowers to combine financing for a lot purchase, construction and permanent mortgage into one first mortgage loan. Ideally suited for borrowers who are purchasing new construction, the USDA OTC loan offers the benefits of one closing for all financing.
Updated USDA OTC Program overlays and eligibility include:
- Site-Built, Modular and Manufactured homes:
- Maximum of $250,000 disbursement at closing for land acquisition or payoff.
- Building permits (where required by the jurisdiction):
- Site-Built and Modular home – applicable building permits to be obtained prior to closing.
- Manufactured home – applicable building permits to be obtained prior to closing when the initial disbursement is greater than $75,000.
- A minimum five percent (5%) contingency of the total cost to construct be built into the contract price. The contingency is not required for No Draw manufactured Home Transactions.
In which scenarios is the USDA One-Time Close Construction Loan a good option?
The USDA One-Time Close loan program can provide an ideal solution for the following borrower scenarios:
- Building a new home on a vacant lot and in need of financing
- Less-than-perfect credit rating
- Not a lot of cash available for a down payment
- Wants the security of a fixed interest rate
- Having trouble finding an available home
- Wants custom home features
Pros and Cons of a USDA Loan | All You Need to Know About USDA Home Loans EXPLAINED
What financing options does USDA Rural Development offer?
USDA Rural Development and its lending partners have affordable financing options for homebuyers who are considering building their dream home. Through USDA Rural Development’s Combination Construction-to-Permanent Loan Program (PDF, 158 KB), USDA-approved lenders with experience in construction loans can help borrowers who want to build a home.
What is a USDA construction loan?
USDA construction loans can finance the land, build your home, and serve as your long-term mortgage. They essentially roll three loans into one. Plus, there’s no down payment required and only one set of closing costs. However, these loans can be hard to find. You also need to be eligible and build in a qualified rural area.
Can you buy a home with a USDA construction loan?
A USDA construction loan allows you to purchase both the land and the home. But some restrictions apply. For example, the land must be in a USDA-approved location. These areas must be “rural in character,” though many small towns and suburbs qualify. “Also, this is not a loan that you can use to purchase land now and build on it at a later time.
Can you get a USDA construction loan with no down payment?
All financing is wrapped into one mortgage with no down payment required. These loans can be ideal for consolidating your financing applications and reducing your closing costs. However, you’ll have to face obstacles that don’t exist with conventional loans, including finding a USDA-approved lender. What Is a USDA Construction Loan?