USDA One Time Close Loan Requirements: A Complete Guide for 2023

The USDA one time close loan, also known as the USDA single close construction loan allows borrowers to purchase land build a new home, and get permanent financing all in one loan. This convenient loan product eliminates the need for separate land, construction, and mortgage loans.

If you’re looking to buy vacant land in an eligible rural area and build your dream home on it, the USDA one time close loan can make the process simpler. However, these loans have strict borrower, property, and lender requirements that you’ll need to meet to qualify.

In this comprehensive guide, we’ll walk through the key USDA one time close loan requirements, pros and cons, and steps to getting approved. Read on to see if this unique construction loan is right for you.

Overview of the USDA One Time Close Loan

The USDA one time close loan rolls three major real estate loans – the land purchase, construction loan, and permanent mortgage – into one This allows borrowers to buy land, build a new home, and lock in long-term fixed rate financing all in a single transaction

With a one time close loan, you only go through one loan application one set of closing costs and one appraisal and inspection. Once construction is complete, the loan automatically converts to a traditional 30-year fixed rate mortgage.

These loans are backed by the U.S. Department of Agriculture (USDA) and issued by approved lenders. They provide 100% financing, meaning no down payment is required.

The interest rate is typically higher than standard mortgage rates. But it allows borrowers with low savings to become homeowners without draining their accounts.

Borrower Requirements

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

• Credit score: Most lenders require a minimum score of 640. A few may accept 600.

• Debt-to-income ratio: Your DTI should be below 41% to qualify. Your new mortgage payment can’t exceed 29% of gross monthly income.

• Income limits: Your household income must be below the limit for your county and family size. These are based on 115% of your area median income.

• Bankruptcy: You can’t have declared bankruptcy within the past 2 years.

• Mortgage payment history: On-time mortgage and rent payments are expected for the past 12-24 months.

• Job history: Stable income and employment for at least 2 years is preferred. Gaps should be explained.

The lender will verify all of these requirements through your credit report, tax returns, pay stubs, and other financial documents.

Property Requirements

In addition to personal requirements, the home and land you wish to build on must meet USDA guidelines:

• Location: The property must be in a designated rural area. Small towns and some suburbs can qualify.

• Primary residence: You must intend to live in the home as your primary residence. Second homes don’t qualify.

• Approved builder: Your builder must be authorized by the USDA lender. They’ll review experience, licensing, credit, and insurance requirements.

• Construction warranty: The builder must provide a new home warranty covering defects for 1 year.

• Property types: Only single-family homes, modular homes, and eligible condos can be built.

• Mixed use: The property can’t be used for commercial or rental purposes. Accessory units may also be prohibited.

In addition, any land loan balance must be paid off with the new construction loan. You can’t receive cash back from left over construction funds.

Lender Requirements

USDA one time close loans are only available through approved program lenders. To offer these loans, lenders must:

• Become an approved USDA lender

• Have staff experienced with construction lending

• Use qualified and vetted builders for projects

• Manage draws and construction payments

• Oversee the construction process and timeline

• Convert the loan to permanent financing upon completion

So you’ll need to find a lender familiar with this unique loan product. Large national lenders likely won’t offer it. Your best bet is to work with a local lender with USDA construction lending experience.

Loan Amounts and Rates

USDA does not set limits on loan amounts for one time close loans. So the amount you can borrow largely depends on:

• Your debt-to-income ratio
• Construction costs in your area
• Appraised value of the finished home
• Your credit score and qualifying income

Interest rates will be higher than standard USDA purchase or refinance loans. Rates can vary greatly by lender, so it pays to shop around. Expect to pay 0.25% to 1.5% higher than current mortgage rates.

Pros and Cons

Before applying, weigh the advantages and disadvantages of the USDA one time close loan:

Pros

• One loan with one closing
• No down payment required
• Potentially lower credit score requirements
• Lower monthly mortgage insurance
• Fixed low rates after construction

Cons

• Harder to find participating lenders
• Rates typically higher than traditional loans
• Strict credit, income, and property requirements
• Building can take 6-12 months to complete
• Higher upfront fees and closing costs

Steps to Getting a USDA One Time Close Loan

If you meet all the requirements, follow these steps to get a USDA one time close construction loan:

1. Find land: The property must meet location, zoning, and other rules. Get a purchase agreement or use land you already own.

2. Select a builder: They must meet USDA contractor experience, licensing, and insurance requirements.

3. Apply with a lender: Find a USDA-approved lender familiar with the one time close loan.

4. Get approved: The lender will verify your eligibility, assets, income, debts, and credit.

5. Close on the loan: This provides financing to buy the land, construction, and permanent mortgage.

6. Start building: The lender will manage payouts to the builder during the 6-12 month construction period.

7. Convert to permanent loan: Once home construction is complete, the loan converts to a fixed rate mortgage.

While the process takes patience, the USDA one time close loan provides a streamlined construction loan path to homeownership. If you meet all the requirements, it can help you buy land and build a home with minimal upfront costs.

Alternatives to Consider

If you don’t qualify for a USDA one time close loan, here are some alternatives worth considering:

• FHA 203(k) rehab loan: Allows you to buy and renovate a home with one loan. Requires just 3.5% down.

• VA one time close: No down payment loan for veterans buying land and building.

• Conventional construction loan: Typically needs 10-20% down but offers better rates.

• Two-close construction loan: Separate loans for the land and construction portions.

• Owner-builder construction: You act as general contractor and hire sub-contractors yourself.

Talk to both USDA lenders and traditional mortgage lenders to find your best construction loan option.

Wrap Up

The USDA one time close loan provides a simplified way to buy land, build a new home, and lock in low fixed rate financing all at once. Just be aware it has stricter requirements than standard mortgages.

To qualify, you’ll need good credit, sufficient income, a USDA-approved property and builder, and to work with a specialty lender. But for the right borrower, it can make constructing your dream home more affordable.

Meet with a USDA lender to evaluate your options and get details on exactly what’s needed to get approved. With proper planning and preparation, you may be able to benefit from this underutilized home construction loan program.