Owning a home is a dream for many Americans, but typical loan regulations make it tough. A USDA construction loan allows purchasers to create their ideal home with a USDA-backed mortgage. USDA These loans have several benefits, but you must first grasp the restrictions.
What Exactly Is A USDA Building Loan?
A USDA construction loan is a mortgage guaranteed by the USDA. USDA The program aims to make rural houses more affordable. Like a regular USDA loan, buyers borrow from a traditional lender and the USDA backs the loan. The main distinction is that a conventional USDA loan can be used to buy an existing property, whereas a USDA construction loan can be used to build a new home. The USDA’s Single-Family Housing Guaranteed Loan Program now offers construction-to-permanent loans. A single-close loan replaces two distinct loans for construction and property purchase. These loans have several benefits, including no down payment. However, buyers may have trouble finding a lender prepared to service this type of loan.
How Do You Get A USDA New Construction Loan?
USDA and FHA loans, for example, can have extra criteria. Not so with a USDA construction loan! This sort of loan requires borrowers to meet a comprehensive list of criteria. USDA construction loan requirements:
- The property must be in a region designated by the USDA.
- Ownership of a principal residence is required.
- A USDA-approved service provider
- For newly constructed homes, the manufacturer’s warranty
- The minimum credit score is 640.
- There cannot be no more than a 41% debt-to-income ratio.
- Null income is allowed for those who do not meet the USDA income guidelines.
- You have not been insolvent for at least two years.
What Is the Process for Obtaining USDA Construction Loans?
Most construction loans require two loans. They first get a construction loan to start the project. They finish the construction and pay off the mortgage. Construction-to-permanent loans, often known as single close loans, are available through USDA construction loans. This procedure combines a construction loan and a standard USDA mortgage. Before construction, borrowers can only close one mortgage so they just have one promissory note and one set of closing costs. After construction, you’ll have a USDA loan with a 30-year fixed rate.
What Are USDA Construction Loans Used For?
USDA construction loans provide up to 100 percent financing, which means they cover the entire cost of the home’s construction and don’t require buyers to make a down payment. They may cover some condos and manufactured homes in addition to single-family homes.
The construction loan pays for things like:
- Purchasing a plot of land
- Fees for inspections
- Insurance for contractors
- Fees for construction administration
- Plans for design
- Landscaping expenses
- Costs of construction
- Costs for utilities and septic systems
The Benefits and Drawbacks of USDA Construction Loans
USDA financing help make rural housing affordable and accessible. However, USDA construction loans have various benefits and drawbacks that should be considered before applying for one.
The Advantages of a USDA Construction Loan
USDA construction loans have a number of advantages. First, unlike traditional USDA loans, which allow borrowers to buy an existing home, USDA construction loans allow borrowers to start from scratch, allowing them to get exactly what they need in a home.
A USDA construction loan also has the advantage of requiring only one loan for the land, construction, and finished home, as opposed to multiple loans for the land, construction, and finished home with traditional construction loans. The borrower saves money because they only have to pay closing costs once. Borrowers are also not required to make payments during the construction process, which allows them to save money.
Finally, the single close loan ensures that borrowers only need to qualify for one loan and that an unexpected change in their financial situation does not jeopardize their chances of closing on the second loan. Assume that after the construction loan was closed, a change in the borrower’s credit score meant they no longer qualified for their 30-year loan. They don’t have to worry about it because they’ve already closed.
The Disadvantages of a USDA Construction Loan
USDA construction loans can be a great investment, but it’s also important to understand the risks. For starters, these loans may be more expensive in the long run than other types of mortgages. Borrowers will pay PMI even though there is no down payment requirement.
USDA construction loans are also frequently more expensive than other loan products. Fortunately, borrowers may be able to reduce their interest rate over time by using a USDA streamline refinance.
Another disadvantage of this loan is that borrowers may have difficulty locating a USDA construction loan lender. The USDA backs the loans, but they are underwritten by a traditional financial institution. This type of loan, however, is not available from all lenders.
What Are Some Alternatives to USDA Construction Loans?
USDA construction loans are a great way for rural homebuyers to find their dream home. However, there are several other loan options for building a house that may be more accessible than USDA construction loans. Buyers should think about how these options fit into their budget and requirements.
Buyers could use a land loan or construction loan upfront and then combine it with a traditional USDA loan instead of taking advantage of the USDA single-close construction loan. Because these loans are still backed by the USDA, they are subject to many of the same conditions.
VA Construction Loan with a One-Time Closing
The USDA construction loan, like the USDA construction loan, is issued by the U.S. Home loans are also guaranteed by the Department of Veterans Affairs. If you are a current or former military service member who meets the VA’s loan requirements, you may be eligible for a VA construction loan. A VA loan, like a USDA loan, does not require a down payment. However, it has the added benefit of not requiring PMI.
FHA Construction Loan with a One-Time Closing
An FHA one-time construction loan is a type of Federal Housing Administration-backed home loan. FHA loans are intended to assist moderate-income borrowers with below-average credit scores in purchasing a home.
FHA and USDA loans are similar in that they both allow for a single close and a construction-to-permanent loan. However, unlike USDA and VA loans, FHA loans necessitate a 3.5 percent down payment (or 10 percent for those with credit below 580).
Construction Loan with a One-Time Closing
Borrowers who do not qualify for a government loan should think about a conventional one-time close construction loan. Conventional loans have different requirements than USDA loans; in general, you need better credit and a lower debt-to-income ratio. They also require at least a 3.5 percent down payment. However, conventional construction loans have advantages as well. There are often fewer requirements, giving buyers more leeway when selecting or building a home.
How Do I Obtain A USDA Construction Loan?
Do you want to apply for a USDA construction loan? Here are the steps you must take to qualify for your loan.
1. Locate a USDA-Recognized Contractor
Before they can qualify for a loan, buyers must enter into an agreement with a USDA-approved contractor. Contractor requirements include the following:
- A minimum of two years’ experience building single-family homes is required.
- Clear a background check
- A minimum of $500,000 in commercial liability insurance is required.
- Credit history that is satisfactory
- License for construction or contractor
2. To obtain a loan pre approval, contact a lender.
You can begin working with lenders to get preapproved for your loan once you have your contractor agreement in place. Keep in mind that you cannot use just any lender; you must use a lender who participates in the USDA loan program. You’ll need to provide information such as income and employment verification, a list of assets and liabilities, a debt-to-income ratio, and a credit check to get pre-approved.
3. Submit Your Application
You can submit your application once you’ve gathered all of the necessary information. Before submitting your application, double-check your contractor and property location, as both are required to qualify. Depending on your circumstances, the loan process could take anywhere from 30 to 60 days.
Bottom Line: Construct the Rural Home of Your Dreams.
Rural homeownership is made more affordable and accessible thanks to the USDA loan program. And, when you use a USDA construction loan, you can build your dream home with manageable loan requirements. USDA construction loans are just one of many options, so do your homework and find the loan that best fits your financial situation.