A USDA construction loan may be ideal if you wish to purchase land and construct your own home.
A USDA construction loan can essentially combine three loans into one by paying for the land, the construction of your home, and your long-term mortgage. Additionally, there is only one set of closing costs and no down payment necessary.
These loans might be challenging to find, though. Furthermore, you must be an eligible borrower who is building in an acceptable rural region. It could be difficult to find a lender.
USDA Construction Loan
Purchasing land and constructing a house may be inexpensive with a USDA construction loan. It combines a fixed-rate mortgage, construction financing, and land financing into a single credit product.
This program is supported by the U.S. Department of Agriculture.
If you are eligible, a USDA construction loan has some significant advantages: there is no down payment necessary; mortgage insurance is reasonably priced; and USDA rates are frequently cheap.
However, USDA construction loans are rather uncommon; it can be difficult to locate a lender that provides one. Additionally, the USDA has severe standards for both the land being built and the home buyer.
Given all these limitations, some borrowers may discover that getting a home loan for construction is simpler with another sort of loan. But a USDA construction loan can be the best option for the right applicant.
Finding the best loan product for you means looking into all your options.
Advantages Of USDA Construction Loan
An eligible borrower can easily purchase land, have a new home constructed, and finance the completed home over a period of up to 30 years with a USDA construction loan.
Since only one closing is involved, there is only one qualification and one appraisal that are needed. You only must pay closing costs once.
The USDA states that funds can be used to construct and buy single-family homes, including eligible manufactured and condos homes.
The loan amount covers buying a lot, reasonable construction administrative costs, contingency reserves, inspection fees, builder’s risk insurance, landscaping costs, and other authorized items.
The USDA construction loan provides funding of up to 100%. That means that no down payment is necessary for qualified borrowers.
Additionally, you are not required to make payments when the house is being built.
Interested in buying land? Check out these beautiful properties for sale in Virginia and North Carolina!
Can You Use a USDA Construction Loan to Buy Land?
You can buy both land and house with a USDA construction loan. But there are some limitations.
First, the land needs to be in a spot that has USDA approval. Even though many small towns and suburbs are eligible, these locations must have a “rural in nature.”
Additionally, you cannot utilize this loan to buy land today and construct on it later. When the loan is closed, you are expected to begin construction as soon as you get the go-ahead, which is typically right away.
It is acceptable to buy land before hiring builders while doing your research. You can obtain a loan to purchase the land elsewhere, and a USDA construction loan lender can then incorporate the repayment of the outstanding balance on the land purchase loan in your new loan.
You cannot receive cash back or be paid back if you pay cash or if you already own the land free and clear. That would entail a cash-out loan, which is not permitted in any configuration of a USDA loan.
Keep in mind that having land ownership does not necessarily make it simpler to obtain a USDA construction loan. However, it might be simpler to obtain a different kind of loan for new construction.
USDA Construction Loan Eligibility
- Most lenders require a 640 minimum credit score
- You must not have experienced bankruptcy in the last two years
- You cannot exceed USDA income limits based on your area’s median income and the size of your family. The USDA Rural Development program is intended to help moderate- and low-income families purchase and build homes
- The property must be in a USDA-approved area
- You must receive a new construction warranty from the builder
- Any remaining funds after construction ends must be applied directly toward your loan principal
- The USDA must approve of your chosen contractors, who are required to have needed licensure, liability insurance, and a minimum of two years’ experience building homes
Additionally, your lender will be looking for 12 to 24 months of spotless credit history, no gaps in your income, no mortgage forbearance, and no missed or late rent payments.
To qualify for this loan, having the cleanest credit, income, and debt ratio feasible is essential. Also, the new house must also be your primary residence, which means you’ll be residing there continuously. Furthermore, only single-family homes, mobile homes, and suitable condominiums are eligible to be erected. Second or vacation houses, homes designed for short- or long-term rentals, accessory dwelling units, self-built homes, commercial structures, and mixed-use projects are not eligible.
Finding USDA Building Loans
A USDA construction loan has significant potential advantages, but it might be challenging to locate lenders who supply them.
For a variety of reasons, not even the biggest lenders provide this option. These include things like a longer closing time, a greater risk to investors and underwriting, the requirement to lock the rate for a longer period, and the necessity for constant communication with many moving elements.
Rates For USDA Construction Loans
The interest rate on a USDA construction loan may be greater than rates for a separate lot loan, construction loan, and 30-year mortgage loan.
Every loan has a specific price depending on unique criteria, charges, and margins. When attempting to qualify at a specific debt ratio with bigger payments, you might also be able to lower your rate.
As always, you should compare rates from a few different lenders to get the best deal possible.
Examine Your Alternatives for Building Loans
For those looking to purchase land and construct a house, a USDA construction loan may be a desirable and inexpensive choice. But not everyone can get access to these difficult-to-find loans.
Fortunately, there are many more loan options available for building.
Investigate the various construction loan options before speaking with lenders to determine which program will best suit your requirements.
Interested in buying land? Check out these beautiful properties for sale in Virginia and North Carolina!
