Everything You Need to Know About USDA Single Close Construction Loans

A USDA single close construction loan allows you to buy land, build a home, and finance it all with one loan and one closing. This can make building a home in rural America more affordable and accessible.

In this comprehensive guide we’ll explain how USDA single close construction loans work, their benefits and drawbacks, eligibility and requirements interest rates, how to apply, and alternative construction loan options.

What is a USDA Single Close Construction Loan?

A USDA single close construction loan combines three major steps of homebuilding into one streamlined mortgage product:

• Buying the land
• Paying for construction costs
• Obtaining a long-term mortgage

With a traditional construction loan, you’d need to take out separate loans for the land purchase, construction and permanent mortgage.

But with a USDA single close loan, everything is wrapped up in one loan, so you only go through one loan application process and one closing. There’s no need to requalify for a permanent mortgage after the home is built

These loans are backed by the US Department of Agriculture’s Single Family Housing Guaranteed Loan Program. The USDA guarantees qualified lenders against loss, allowing them to offer 100% financing on single close construction loans.

How Do USDA Single Close Construction Loans Work?

Here’s a step-by-step overview of how these unique loans work:

• Find land to purchase: You can use USDA site loans to buy property or use land you already own. The property must be in an eligible rural location.

• Get pre-approval: Work with a USDA-approved lender to get pre-approved for financing based on your income, assets, credit score, and debts.

• Select a builder: Your lender will ensure the builder you choose meets USDA requirements for experience and insurance coverage.

• Submit loan application: Provide all required documents to your lender to complete the full loan application.

• Close on loan: At closing, loan funds will be available to buy the land and pay initial construction costs.

• Start building: Once closed, construction can begin on your new home. The builder will submit draw requests as they complete phases.

• Make payments: You won’t make any payments during construction. But once the home is finished, your loan converts to a mortgage with monthly principal and interest payments.

Benefits of USDA Single Close Construction Loans

USDA single close construction loans offer home buyers several advantages:

• One loan for everything: Rather than juggle multiple loans, everything is handled with one single-close loan. This simplifies the process.

• Only one closing: You only have to pay closing costs and go through the closing process once, saving time and money.

• Possible 100% financing: Like other USDA loans, these may offer 100% financing so no down payment is required.

• Below-market interest rates: USDA-backed loans typically have lower rates than conventional loans. Lower rates = lower monthly payments.

• Pay only after building: You don’t make any mortgage payments until construction is finished and the loan converts to permanent financing.

• Rural housing support: The program aids low- to moderate-income families build homes and promotes growth in rural regions.

Drawbacks of USDA Single Close Construction Loans

However, these unique loans also come with a few potential disadvantages:

• Hard to find: Not many lenders offer USDA single close construction loans. You may have to search extensively for options.

• Strict requirements: Both you and the home must meet the USDA’s long list of eligibility requirements to qualify.

• Lengthy process: With numerous approvals required, the application and construction process takes more time.

• Limited home types: The home being built must be a single-family house, manufactured home, or eligible condo.

• Higher rates: Interest rates may be 0.5 to 1% higher than a normal mortgage or refinance.

• Upfront guarantee fee: USDA charges an upfront guarantee fee of 1% of the loan amount.

USDA Single Close Construction Loan Requirements

The path to approval requires meeting many specific USDA requirements for both the property and borrower:

You must:

• Have a minimum 640 credit score
• Have a debt-to-income ratio below 41%
• Meet USDA income limits for your area and family size
• Have steady income and clean credit history

The home must:

• Be located in a rural area
• Be your primary residence
• Use a USDA-approved builder
• Receive a warranty from the builder

In addition, second homes, investment properties, and homes intended as rentals are ineligible. And all contractors must meet experience, licensing, insurance, credit, and background check requirements.

Interest Rates on USDA Single Close Construction Loans

Interest rates on USDA single close construction loans tend to run 0.5 to 1% higher than rates for standard mortgages and refinances.

Rates can vary significantly between lenders. It’s important to shop around with multiple lenders to find the best rate.

According to recent data, current USDA single close construction loan rates average:

• 5.5% – 6% for a 30-year fixed-rate loan
• 6% – 6.5% for a 25-year fixed-rate loan
• 6.5% – 7% for a 20-year fixed-rate loan
• 7% – 7.5% for a 15-year fixed-rate loan

Higher rates are due to the increased risk lenders take on with construction loans. But the single close structure means you lock in one rate for the construction financing and permanent mortgage.

How to Apply for a USDA Single Close Construction Loan

Follow these steps to apply for a USDA single close construction loan:

1. Find a Property and Builder

Locate an eligible property and research builders that meet USDA criteria. Having a builder lined up can help strengthen your loan application.

2. Check Your Eligibility

Confirm you can satisfy the USDA’s income limits and credit score requirements before applying.

3. Choose a USDA-Approved Lender

Search for lenders familiar with single close construction loans. Compare multiple lenders to find the best rates and fees.

4. Submit Your Application

Work with your lender to complete the mortgage application. Be prepared to provide all required documentation and details.

5. Get Appraisal and Approvals

The lender will order an appraisal and manage getting the property and builder approved by the USDA.

6. Close on Your Loan

At closing, you’ll sign final loan documents and the lender will disburse funds to purchase the lot.

7. Start Construction

Once closed, the builder can break ground and start constructing your new home!

Alternatives to USDA Single Close Construction Loans

If you can’t find a lender offering USDA single close loans, here are a few alternative construction and renovation loans to consider:

• FHA 203(k) loans – Finance buying a home and making major renovations with one FHA-insured mortgage.

• VA One-Time Close – VA-backed construction loans for veterans that provide 100% financing.

• FHA One-Time Close – Construction loan option for first-time buyers that allows as low as 3.5% down payment.

• Conventional construction loans – Financing from private lenders like banks and credit unions. Tend to require 10-20% down payment.

• USDA site loans – Standalone USDA financing to purchase land for home construction.

The best loan for you depends on your financial situation, credit score, down payment funds, and the property you plan to buy. Be sure to explore multiple options to find the right construction loan program.

The Bottom Line

USDA single close construction loans conveniently combine land purchase, construction financing, and a permanent mortgage into one loan. This streamlines the process and reduces costs for building a home in a rural area.

Just be aware it can be challenging to find a lender offering these niche loans. And you must satisfy strict USDA eligibility standards. But for the right borrower building in an eligible location, a USDA single close construction loan can be an affordable path to homeownership.