Get the Financing You Need to Build Your Dream Home with a USDA Rural Development Construction Loan

If you’ve always dreamed of building your perfect home in a rural area a USDA Rural Development construction loan could make that dream a reality. With 100% financing and affordable interest rates, these loans from the U.S. Department of Agriculture provide a unique opportunity for eligible homebuyers to buy land and build a home with one loan.

But USDA Rural Development construction loans can be tricky to find and qualify for. In this comprehensive guide, we’ll explain everything you need to know about these specialized loans, including:

• What is a USDA Rural Development construction loan?
• How do USDA Rural Development construction loans work?
• What are the benefits and drawbacks?
• What are the eligibility and property requirements?
• How to apply and get approved
• Alternatives if you don’t qualify for USDA

Let’s start with the basics.

What Exactly is a USDA Rural Development Construction Loan?

A USDA Rural Development construction loan combines three major financing needs into one loan:

• Land purchase
• Construction costs
• Long-term mortgage

With a traditional construction loan, you’d need separate financing for the land, construction, and then long-term mortgage after the home is built The USDA loan simplifies this by rolling everything into one loan with a single application, closing, and monthly payment

These loans are backed by the USDA’s Rural Development program. The agency supports affordable housing opportunities for moderate and low-income families in small towns and rural areas.

USDA Rural Development construction loans go by a few other names, including:

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

No matter what you call it, the bottom line is you can buy land, build a home, and end up with a fixed-rate mortgage using one USDA-backed loan.

How Does a USDA Rural Development Construction Loan Work?

Here’s an overview of how these unique loans work:

Step 1: Find Land

You can purchase land or use land you already own. The property must be in an eligible rural location (more on that below).

Step 2: Find a Builder

Your builder must be approved by both the USDA and your lender. They need proper licensing, insurance, and a minimum 2 years construction experience.

Step 3: Apply for the Loan

Work with a USDA-approved lender to apply for financing. You’ll provide documents to prove your income, assets, credit, etc.

Step 4: Close on the Loan

At closing, you’ll finalize the land purchase (if needed) and the construction loan. Building can then begin!

Step 5: Construction Period

No monthly payments are due during construction. The lender disburses payments to the builder at certain project milestones.

Step 6: Construction Completes

Once the home is finished, the loan converts to a traditional 30-year USDA mortgage. You begin making monthly principal and interest payments.

It’s a streamlined process that makes building a home more affordable and accessible. But it’s not the right loan for everyone…

Pros and Cons of USDA Rural Development Construction Loans

Let’s look at some of the top advantages and disadvantages of USDA Rural Development construction loans:

Pros:

• One loan/closing – Simpler process with less paperwork
• No downpayment required – 100% financing means you can build with no money down
• Lower monthly payments – Interest rates on USDA loans are below conventional loans
• Shorter construction loan term – Converts to permanent financing sooner than other construction loans

Cons:

• Limited availability – Harder to find lenders offering USDA construction loans
• Strict requirements – Both property and borrower must meet guidelines
• Potentially higher rates – USDA loan rates can be higher than standard mortgages
• Longer process – More parties involved means extra time needed

The biggest consideration is finding a lender willing to do USDA construction loans. Even large national lenders shy away. But for the right buyer, building in rural America with a USDA loan can be an affordable path to homeownership.

Next, let’s look at the specific eligibility requirements.

USDA Rural Development Construction Loan Requirements

To qualify for one of these loans, both you and the property must meet certain criteria set by the USDA:

Borrower Requirements:

• Credit score of 640+
• Debt-to-income ratio below 41%
• Income within USDA limits for area median income
• Clean credit history with no late payments, collections, or bankruptcy in past 2 years

In addition to solid credit and income qualifications, you must plan to use the home as your full-time residence. Investment properties or second homes don’t qualify.

Property Requirements:

• Located in an eligible rural area
• Single family home, condo, or manufactured home
• Primary residence (no rentals or vacation homes)
• Must use USDA-approved contractor

The home can be built on land you already own or land purchased with the loan. But it must be in a rural area designated as eligible by the USDA property eligibility tool. More on locating qualified areas next.

Where Can You Get a USDA Rural Development Construction Loan?

These loans are only available for properties in USDA-designated rural areas. But don’t let the word “rural” fool you. Many small towns and suburbs can qualify too.

So how do you know if your location is eligible?

The USDA has an online property eligibility tool that will tell you if a specific address meets its population and density requirements for rural areas. You can access it here:

USDA Property Eligibility Tool

In general, eligible locations will be outside urban areas, with populations under 35,000. But the boundaries vary, so be sure to check the USDA tool for any address you’re considering.

If the land isn’t eligible, you may need to consider a different type of construction loan.

How to Apply for a USDA Rural Development Construction Loan

If you’ve found an eligible property and meet borrower requirements, follow these steps to apply:

1. Choose a USDA-Approved Builder

Research builders with proper licensing, insurance, and experience. Get price quotes and choose your contractor.

2. Find a USDA-Approved Lender

These loans aren’t offered by every lender. Search online for “USDA construction lenders” and vet a few options.

3. Submit Your Application

Work with your lender to complete the application detailing your finances, property, and builder. Be prepared to submit tax returns, pay stubs, credit history and other documentation.

4. Obtain Approval

It takes 30-60 days to process the application and obtain approval from the USDA. Timelines vary by lender.

5. Close on Your Loan

Finalize loan documents, land purchase (if needed), and construction contract. Building can begin!

The entire process takes 2-3 months. Be patient and work closely with your lender to provide needed documents throughout.

Alternatives if You Don’t Qualify for a USDA Loan

USDA Rural Development construction loans are great, but not everyone will qualify. Here are some alternative construction loans to consider:

• FHA One-Time Close – Just 3.5% down payment required
• VA One-Time Close – For veterans/military buyers; no downpayment
• Conventional Construction – Higher credit score typically required
• Renovation loans – Finance purchase + renovations

Shop around with a few lenders to see which loan programs you’re eligible for. Consider both government-backed and conventional loan options.

The right construction loan depends on your credit, income, downpayment funds, and other personal factors. Discuss options with mortgage lenders to choose the best fit for your situation.

Is a USDA Rural Development Construction Loan Right For You?

If you want to build your dream home in rural America, a USDA construction loan offers an affordable path to homeownership. With no downpayment required and below market interest rates, you can buy land and build with one loan and a lower monthly payment.

Just be aware these loans are tougher to obtain and require both you and the property to meet strict guidelines. Only work with approved USDA lenders and builders in eligible rural areas.

But for the right borrower, building with a USDA Rural Development construction loan can make your dream of a custom-built home in the countryside a reality!