How To Save with USDA Construction Loans When Building a New House
If there’s one thing that characterizes rural areas, it’s the abundant amount of land available for home building. Buying and building can often be a good real estate strategy, but too often the process requires two loans, two closings, and lots of needless expenses. With USDA construction loans, you only need one closing. That means big savings upfront, plus – with needed financing in hand to both buy property and build a home – there’s less worry and hassle.
USDA construction loans – also known as USDA construction-to-permanent loans or USDA one-time close construction loans – are a special type of real estate financing. They allow you to finance both the purchase of land and the construction of a new house on that land with one mortgage.
Unlike traditional home purchase loans, which require you to have a house already built and ready to purchase, USDA construction loans focus on those with an interest in custom-building. It allows borrowers to erect a home designed and built for their specific interests, with the designs and touches they want.
USDA construction loans are designed to assist borrowers in two areas. First, the acquisition of raw land. Second, the construction of a home.
Costs that are covered by a USDA single-close construction loan include:
Additional costs that may be paid for with your USDA construction loan include surveys, permits, appraisals, inspections, architectural design plans, plan reviews, and lender construction administration fees. Your lender is responsible for paying the builder as work is completed.
One of the most convenient features of USDA construction loans is that they are single-close loans. This means that the loan process is simplified into one application and one closing process for both the property’s acquisition and construction.
For most other loan programs, building a new home requires two loans: one for buying the property and a second loan for building. Each of these loans must go through the closing process individually. A second closing can mean additional costs for title insurance, transfer taxes, new financing, legal fees, etc. These expenses add up and can represent big money.
However, with a USDA single-close construction loan, borrowers only go through the closing process once. This saves time, reduces paperwork and minimizes closing costs.
For non-USDA construction loans, the transition from the initial construction loan to a permanent mortgage can be complex and costly. However, USDA single-close construction loans are designed to smoothly transition into a permanent mortgage without needing additional loans or refinancing.
USDA construction-to-permanent loans combine a construction loan with a traditional USDA loan in a single mortgage. Once your new home is completed, your construction loan will automatically transition into a standard 30-year, fixed-rate USDA mortgage.
One of the most important features of USDA construction loans is the ability to finance your new home build with no down payment. This is a rare perk. Most real estate financing requires a significant down payment. However, without a down payment requirement, borrowers can more readily afford USDA financing. As with any USDA loan, the homebuyer must meet income and eligibility requirements.
All mortgages have certain requirements, such as so much down or a given credit score. USDA construction loan requirements follow the usual standards needed for USDA financing, but with adjustments so that construction can be funded. For example:
Only USDA-approved contractors can provide builder services. Contractors must meet specific financial, licensing, and experience criteria to ensure they can complete the project according to USDA guidelines.
Since USDA construction loans allow for no down payment financing, the USDA requires approved contractors to ensure the home is built properly and within budget. Working with an experienced and USDA-compliant builder reduces risks for both the borrower and the lender.
If you're considering a USDA construction loan, your lender can provide a list of approved contractors or guide you through the approval process for a contractor of your choice.
If you're considering a USDA single-close construction loan, here are the steps you should follow to increase your chances of approval and ensure a smooth experience.
The first step is to find lenders that offer USDA construction loans. Compare the services, interest rates, and fees from several lenders to find the best match for your financial situation.
Once you have a lender in mind, the next step is to choose a USDA-approved contractor or builder. This is crucial, as an approved contractor is a loan requirement.
Your lender may provide a list of approved contractors, or you can contact the USDA directly for recommendations. Make sure your chosen contractor has experience in completing projects that meet USDA standards and regulations.
Before you can proceed, you need to secure a plot of land in an area that’s eligible for USDA financing. USDA loans are intended to promote development in rural areas, so the land must meet certain location requirements to qualify for a USDA construction loan.
Visit our interactive USDA eligibility map to help determine if your area meets the rural requirement.
