Navigating USDA Single Close Construction Loan Requirements

Buying a home can be an exciting yet daunting process. For many in rural America, navigating the mortgage loan process poses a significant challenge. This is where USDA single close construction loans can help. In this comprehensive guide, we’ll explore what these loans are, their benefits, eligibility requirements, and step-by-step process.

What is a USDA Single Close Construction Loan?

A USDA single close construction loan combines the construction loan and traditional long-term mortgage into one loan with a single closing. This saves borrowers money by avoiding multiple closings and sets of closing costs.

With these loans, the construction phase loan portion covers building the home. Once construction completes, the loan converts to a permanent traditional mortgage without requiring refinancing or a second closing.

Essentially, USDA provides lenders a guarantee on the full loan before construction starts. This reduces risk for lenders and builders, making affordable construction financing accessible to more rural homebuyers.

Benefits of USDA Single Close Construction Loans

USDA single close construction loans offer unique benefits for homebuyers. builders realtors and lenders

• For homebuyers: Only one set of closing costs and no need to refinance once construction completes. Interest or full PITI payments can be made from reserve funds during construction.

• For builders Don’t need to finance construction costs themselves Can expand customer base

• For realtors: Get paid at closing before construction starts, a rarity in real estate transactions. Can also expand customer base.

• For lenders: Protected during construction by USDA’s guarantee. Can sell loans on secondary market immediately. Gain CRA credit and expand customer base.

USDA Single Close Construction Loan Eligibility

To qualify for a USDA single close construction loan, applicants must meet certain eligibility standards:

• Location: The home must be in an eligible rural area as defined by USDA rural income and population limits.

• Income Limits: Household income must be below applicable area income limits, typically 115% of median income adjusted for household size.

• Credit History: Applicants must demonstrate an acceptable credit history with a minimum 620 FICO score. Must have stable and dependable income.

• First-Time Homebuyer: At least one applicant must be a first-time homebuyer, with exceptions for veteran homebuyers.

• Homebuyer Education: Applicants must complete homebuyer education counseling.

• Debt-to-Income: Overall debt-to-income ratio must be below 45%. A ratio up to 50% may be allowed with strong compensating factors.

• Downpayment: No downpayment required.

How USDA Single Close Construction Loans Work

Here is an overview of the step-by-step process:

1. Application: Work with a USDA approved lender to apply and get pre-approved.

2. Loan Processing: The lender will process the application and underwrite the full loan amount.

3. Appraisal: An appraiser will estimate the future as-completed value of the home. This factors in land value, construction costs, and soft costs.

4. Closing: At closing, land acquisition and closing costs get paid. Lender requests USDA’s loan guarantee.

5. Construction: Builder constructs home, with lender managing draws. Borrower makes interest or full PITI payments from reserves.

6. Completion: Once complete, the loan converts to a traditional permanent mortgage amortized over 30 years.

Throughout the process, the lender oversees construction draws and completion. USDA issues the loan guarantee immediately after closing based on the home’s future appraised value. This protects the lender during construction.

Key Requirements During Construction

Throughout construction, lenders and builders must adhere to USDA requirements:

• Fixed price construction contract with detailed budget.

• Certified house plans and specifications.

• Required thermal efficiency standards.

• Documented construction draws and inspections.

• 1 year builder warranty plus occupancy certificate and inspections. Or 10 year insured builder’s warranty.

• Change orders must be approved. Contingency reserves up to 10% allowed.

• Excess funds applied as principal reduction. Cash back to borrower strictly limited.

Ready to Apply?

USDA single close construction loans offer a streamlined path to homeownership. By combining the construction loan and mortgage, borrowers save on costs and lenders reduce risk. If you’re looking to build a home in a rural area, connect with a USDA approved lender to get started. With proper planning and compliance, you’ll be moving in before you know it!