Constructing a home can be a costly endeavor, and obtaining both a primary mortgage and construction loan to fund it can be quite difficult. Luckily, a One Time Close Construction USDA loan can assist with both of these issues. Find out all about USDA construction loans and how to get one with this helpful guide.
What Is a USDA Loan for New Construction?
A USDA One Time Close Construction loan is a type of mortgage loan that is backed by the U.S. Department of Agriculture (USDA) and functions as a construction-to-permanent loan, which is distinct from a traditional USDA home loan.
These loans do not require a down payment, and you only need to close on a single loan to receive funding for the construction of your property plus your completed property. However, to be eligible for a USDA construction loan, you must construct your property in an area of the country defined as rural by the USDA.
The USDA insures but does not directly provide these construction loans. Instead, you must apply for a USDA construction loan with a USDA-sanctioned lender who offers these loans.
Requirements for a USDA Construction Loan
To be eligible for a USDA construction loan, your newly-built property must meet specific requirements as follows:
- The house you construct must serve as your main residence; the loan cannot be used to finance a vacation home or investment property.
- The house you construct must be located in a region deemed rural by the USDA. To check if a region qualifies as rural, you can use the USDA Property Search tool.
- You are required to use a builder who is licensed and insured.
You’ll additionally need to meet specific income and credit criteria to be eligible for a USDA construction loan:
- You’ll require a credit score of at least 640.
- Your debt-to-income ratio should not exceed 41%.
- Your overall income must not exceed the USDA’s income limit for the county in which you reside. These income limits vary by location, with higher-cost counties having a higher income threshold. To find out your county’s income limit, you can use the USDA’s Income Search tool.
How to Start Applying for a USDA Construction Loan
To begin the process of obtaining a USDA construction loan, the first step is to locate a contractor who will construct your home according to USDA requirements. The contractor must satisfy certain criteria set by the USDA, including having at least two years of experience building single-family houses, commercial liability insurance covering at least $1,000,000, and an acceptable credit history. Secondly, you will need to locate a USDA-authorized lender to provide these loans.
Finally, the last step is to complete your loan application. This will require you to provide your personal details and an estimated monthly income and debt figure. You will also need to give your lender permission to review your credit.
In addition, you’ll need to submit financial documentation copies that your lender can check to confirm your income, such as two of your most recent pay stubs, two months of bank statements, as well as tax returns and W-2 forms from the previous two years. Your lender will review these documents to determine whether you meet the qualifications for the loan and to set the interest rate.
