How to Build a Home Using a USDA Loan
If you own land and want to build your own home, a USDA home loan seems ideal.
A USDA home loan can finance the land, build your home, and serve as a long-term mortgage – essentially three loans are combined into one. Plus, no down payment is required and only one set of closing costs.
However, these loans can be difficult to find. And you must be an eligible borrower in an eligible rural area. Finding a lender could also be a challenge.
Read on to learn more about the rules and interest rates on USDA home loans and other types of loans that could potentially be a better option.
Check your eligibility for construction loans (March 4, 2021)
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What is a USDA construction loan?
A USDA home loan can be an inexpensive way to buy land and build a home. It combines land financing, construction and a fixed rate mortgage into one loan product.
This program, supported by the U.S. Department of Agriculture, can also be referred to as:
One-time home loanSingle-close loanCombination permanent-construction loanAll-in-one home loan
A USDA home loan offers some serious benefits if you qualify. No down payment is required, mortgage insurance is affordable, and USDA rates are usually low.
However, USDA construction loans are quite rare; It can be difficult to find a lender that offers one. And USDA has strict requirements for the home buyer and the property being built.
With all of these constraints, some borrowers will see other types of construction loans as an easier route to home ownership. But for the right person, a USDA construction loan might be ideal.
The most important thing is to explore all of your options and find the right loan product for you.
Check your eligibility for construction loans (March 4, 2021).
Benefits of a USDA home loan
Brandon Mushlin of BuildBuyRefi.com explains that a USDA home loan makes it easy for an eligible borrower to purchase land, build a new home, and finance the home for up to 30 years – all in one simple loan.
You only have to pay the graduation cost once as it is a single graduation and only requires one qualification and assessment.
"You can either find land that you can contract, use the current land you already own, or combine land you have received from your family with your selected and approved contractor to build your home", he says.
Funds can be used to build and purchase single-family homes, including eligible condos and prefabricated houses, according to the USDA.
The loan amount includes:
Buying Land Reasonable Building Administration Costs Contingency ReservesVerification FeesBuilder Risk InsuranceLand Sourcing CostsOther Authorized Items
Like other loans backed by the U.S. Department of Agriculture, the USDA home loan offers up to 100 percent funding. This means that qualified borrowers do not have to make a down payment.
In addition, you are not required to make any payments during the construction of the house.
Disadvantages of the USDA home loan
On the flip side, these loans are hard to find and rarely offered by lenders, according to Richie Duncan, senior loan officer at Nationwide Home Loans Group, a division of Magnolia Bank.
“USDA home loans require patience from everyone involved. Closures take longer and can include brokers, insurance agents, city or district approval requirements, builder approval, multiple insurances of your loan record, appraisals, and more, ”explains Duncan.
"And the interest rate you will be charged will likely be higher than normal home purchase and refinancing loans."
However, you may not hold onto that higher rate forever.
After your house has been built (at least 220 days later) and after six payments on time, if market conditions permit, you can “choose an optimized refinancing or an interest-limited refinancing to lower your interest rate if possible”. adds Duncan.
While there are many requirements and constraints: "Once received, this is one of the best loans for a borrower to build their dream home out of pocket with little to nothing," says Duncan.
"That way, you can save your liquidity, increase your land ownership, and avoid the higher 10 to 25 percent down payment requirements that other traditional higher-risk lenders impose."
Check your eligibility for construction loans (March 4, 2021).
Can You Buy Land With a USDA Home Loan?
With a USDA home loan, you can purchase both the land and the home. However, there are some restrictions.
First, the land must be in a location approved by the USDA. These areas must be "rural in character," although many small towns and suburbs qualify.
“Plus, this is not a loan that you can use to buy land now and build on it later. Once you complete the loan, if you get the green light, you are expected to start building, which usually happens quickly, ”says Duncan.
If you want to buy land first while shopping for home builders, it is allowed. You can take out a loan elsewhere to buy the land and then a USDA construction lender can include the repayment of that property in your new loan.
“If you pay in cash, or if you already own the land freely and freely, you cannot get cash back or be repaid. This would involve a withdrawal loan that is not allowed in any version of a USDA loan, ”warns Mushlin.
Note that getting a USDA construction loan may not be easier if you already own the land. However, it might be easier to get another type of new home loan.
"When your land is paid off or wholly owned, your loan-to-value ratio decreases, which means you don't need 100 percent funding," continues Duncan.
"This increases your potential equity position and lowers your payment further than a borrower buying new land or paying full price for the land."
USDA Construction Loan Eligibility
Mushlin and Duncan point out that there are several rules associated with USDA construction loans.
The conditions of participation include:
Most lenders require a minimum loan value of 640
You must not have experienced bankruptcy in the past two years
You cannot exceed USDA income limits based on the median income in your area and the size of your family. The USDA Rural Development Program is designed to help middle and low income families buy and build homes
The property must be in a USDA approved area
You must receive a new building guarantee from the client
Any funds remaining after construction has started must be transferred directly to your loan capital
The USDA must approve the contractors you choose who require a license, liability insurance, and at least two years of home construction experience
Your lender will also be looking for 12 to 24 months of clean, pristine loans, no income gaps, no mortgage leniency, and no late or missing rental payments.
"Basically, you want to have the cleanest credit, income, and debt ratio possible in order to get this loan," suggests Mushlin.
In addition, the new home must be your primary residence, which means that you will live there all day. And the types of homes that can be built are limited to single-family homes, prefabricated homes, and eligible condominiums.
"Second homes, holiday homes, homes for short-term or long-term rental, ancillary units, self-built homes, commercial buildings and mixed-use buildings are not eligible," adds Duncan
How to Find a USDA Construction Loan
While a USDA home loan has great potential benefits, it can be difficult to find lenders who will offer them in practice.
“Even the largest lenders don't offer this program for many reasons. These include factors such as a longer close time, higher risk for underwriting and investors, a longer rate lockout, and the need to communicate with many moving parts over a long period of time, ”says Duncan.
An online search for "USDA Home Loan Lenders" should bring up some lenders for you to investigate.
“I recommend choosing a lender who knows exactly what this process is about and who has already closed these loans. You want someone who is transparent and open-minded and who doesn't gloss over or gloss over the details of your search, ”advises Mushlin.
USDA home loan rates
As mentioned earlier, the interest rate you might quote on a USDA home loan is likely to be higher than the interest rates offered on a separate lot loan, home loan, and 30 year mortgage loan.
"The interest rates between lenders, investors and brokers who offer this loan are difficult to compare," says Duncan.
“Each loan is uniquely valued based on individual factors, fees and margins. You may also be able to lower your interest rate, which can become a factor in trying to qualify for higher payments on a particular debt ratio. "
As always, you should shop with a few different lenders to find the best rate available.
If you can't find multiple USDA construction loan lenders to compare, expand your search to include other types of construction loans.
By looking at the interest rates on alternative home loan programs (shown below) you can at least get a sense of how competitive a USDA home loan is and whether it is really your best option.
Alternative home and renovation loans
Below are a few more construction loan options to consider if you're having trouble finding USDA loans or just want to broaden your search:
A VA One-Time Thesis Loan – These loans, supported by the Department of Veterans Affairs, are available to qualified veterans and active service members. Like USDA loans, they can provide up to 100 percent funding. An FHA One Time FHA Home Loan – These loans are backed by the Federal Housing Administration and only require a 3.5% decrease and have mild credit policies conventional one-time tight home loan – Traditional loans backed by Fannie Mae and Freddie Mac usually require a credit score of 620 or higher and a minimum of 5% decline FHA 203k loan – Can be used to finance the purchase price and the cost of renovations to an existing House of Lords. Requires only 3.5% less and a credit score of 580 A traditionally USDA home loan this can be obtained after receiving a separate lottery loan and / or Home loan
The right type of home loan will depend on your location, home budget, creditworthiness, and down payment, among other things.
You should make sure that you have examined all of your options and found the best loan for you before signing up.
Review Your Construction Loan Options (March 4, 2021)
USDA Construction Loan FAQ
Does USDA make construction loans?
Yes. The USDA offers a construction to duration combined loan, also known as a single close loan. This loan combines real estate financing, new construction and a fixed rate mortgage into a single loan.
Can you finance a construction loan 100 percent?
Richie Duncan at Magnolia Bank explains that a USDA home loan offers 100 percent financing with no down payment, as long as you are well qualified for loans and meet income and other requirements.
Is it easier to get a construction loan when you already own the land?
Duncan says it is neither easier nor more difficult. However, if you own your land in full, your loan-to-value ratio can degrade, meaning you don't need full 100 percent funding.
Can you build a house on land that you are still paying for?
If you have an outstanding lot loan, that loan needs to be repaid and added to your new USDA home loan per Duncan.
What Disqualifies a Home from USDA Funding?
A USDA home loan can only be used to finance single family homes, prefabricated homes, and eligible condominiums. Vacation or second homes, short-term and long-term rentals, additional residential units, a home you built, commercial and mixed-use buildings do not qualify for USDA financing. Additionally, the lot must be in a USDA-eligible "rural" area.
What credit do you need for a USDA construction loan?
Most lenders require a minimum FICO loan score of 640 to qualify for a USDA construction loan.
How long does a construction loan last?
A USDA construction loan is usually converted into a 30-year fixed-rate mortgage. At least 220 days after construction is complete and after six on-time payments, you may be able to lower your interest rate by refinancing through the USDA Streamline Refinance or another refi program.
How do I apply for a USDA construction loan?
You can apply for a USDA construction loan from USDA approved lenders who offer this loan program. Look for available lenders online.
Review your home loan options
A USDA home loan can be an attractive and affordable option for buying land and building a home. However, these hard-to-find loans are not available to everyone.
Fortunately, there are many other home loan programs in the market.
Find out about the different types of construction loans and speak to the lenders about which program best suits your needs.
Check your new plan (March 4, 2021)