Are you excited about the idea of building your own home but feeling a bit overwhelmed by the construction loan process? We totally get it!
Obtaining a USDA construction loan can be complicated, but with a good understanding of the loan process, it’s a fairly simple procedure.
To help with this, we’ll break down the requirements, application process, and benefits of USDA construction loans, making it easy for you to understand and apply.
Ready? Let’s get into it!
What Are USDA Loans?
USDA loans are designed to help low and moderate-income borrowers finance a home in eligible rural and suburban areas.
They promote homeownership in rural communities and provide affordable financing options for eligible borrowers who may not qualify for conventional loans.
USDA loans offer competitive interest rates, low or no down payment options, and flexible credit requirements with variations like land loans, purchase loans, and construction loans. This article discusses the latter.
Who Offers USDA Construction Loans?
USDA construction loans are unique in that they combine both the construction loan and permanent mortgage into a single loan, eliminating the need for separate financing for construction and then refinance into a permanent mortgage after the construction is complete.
This streamlines the financing process and reduces overall closing costs for borrowers. If that solves your problem, many regional banks, credit unions, and private lenders specialized in construction loans and are a great place to start your search.
Here is a list of sources to begin your search:
Banks
Banks are a traditional source of financing for those looking to take out a USDA construction loan. Banks typically provide various loan products, including fixed-rate, adjustable-rate, and jumbo loans, as well as ones tailored to first-time or low-income home buyers.
Before applying for a USDA construction loan from a bank, it’s important to know the following:
- Bank’s eligibility requirements
- Credit score and down payment requirements
- Interest rates and fees
- Application process and necessary documents
- Construction process requirements
- Get pre-approved before house hunting
Also, compare different offers from different lenders and work with a lender you trust for clear loan terms and conditions.
It is always advisable to shop around and compare different offers from different lenders and work with a lender that you trust to provide you with clear and detailed information about the loan terms and conditions.
Credit Unions
Credit unions can be a great option for those seeking USDA construction loans, as they often provide low-interest rates and have fewer restrictions than some traditional banking institutions. For those looking to save money and avoid overly stringent requirements, credit unions may be the way to go.
Before applying, It’s crucial to understand their terms and conditions:
- Eligibility requirements
- Credit score and down payment requirements
- Interest rates and fees
- Membership requirements
- Application process and necessary documents
- Construction process requirements
Again, shop around and compare different offers from different credit unions.
Mortgage Lenders
Mortgage lenders are another popular source. They offer a variety of loan products, including fixed-rate mortgages, adjustable-rate mortgages, and jumbo loans, all with competitive interest rates. Before applying, compare their interest rates and fees, and pick a lender you trust for clear terms.
Also, be sure you understand the application process, check for any specific construction requirements, choose a lender with a good reputation and customer service, and read the loan terms and conditions carefully.
Private Lenders
Private lenders are another option for those looking for funding for borrowers with less-than-perfect credit or income, but they may also have higher interest rates and fees than other types of lenders.
Private lenders may offer a “one-stop shop” option called construction-to-permanent financing, which rolls the construction loan and long-term mortgage into one package.
It may be more convenient, but make sure you understand the terms, interest rate, and fees before you sign up for it.
It’s wise to ask questions and compare offers from different lenders before making a final decision, as this could save you thousands of dollars in the long run.
Can You Build a House With a USDA Loan?
Absolutely, building your dream home is not only possible but also an exciting opportunity.
The USDA offers two types of loans for home building: the USDA Direct Housing Loan and the USDA Guaranteed Housing Loan, which have advantages and disadvantages depending on the individual’s needs.
- USDA Direct Housing Loans are designed to help low-income families to build, renovate, or repair a home in eligible rural areas. These loans usually have lower interest rates and longer repayment periods, making them an excellent option for those who are just starting out.
- USDA Guaranteed Housing Loans are issued by private lenders and are typically used for larger construction projects. These loans are backed by the USDA and may offer better terms than other loan options but come with higher interest rates and shorter repayment terms.
Both types of USDA loans for home building have specific eligibility requirements, including income limits, credit score requirements, and property location restrictions.
In rare cases, you may also be required to make a down payment. This isn’t one of the USDA loan’s strongest requirements, unlike the FHA loan, another government-backed loan that requires a down payment.
USDA Construction Loan Credit Requirements
Before you apply for a USDA loan, you’ll need to make sure you have the requirements to make it happen.
Here’s a brief summary of the eligibility criteria:
- A minimum credit score of 620
- Stable and reliable income
- A debt-to-income ratio of 41% or less
- Good credit history with no past delinquencies, foreclosures, or bankruptcies
- Ability to repay the loan
- Employment and income stability
Something to keep in mind is to have all the necessary documentation ready, including income tax returns and other financial documents that may be required. This will make the process go much smoother.
USDA Loan Building Requirements
All the USDA loan variations come with somewhat similar eligibility criteria that determine if you qualify and how much you can qualify for. These are the guidelines that must be met in order for your loan application to be approved.
For home building, these include:
- The property must be located in an eligible rural area.
- You must meet income and credit requirements.
- You must intend to use the property as their primary residence.
- The construction of the home must meet local and state building codes and standards.
- The construction must be completed by a licensed and approved builder.
- The plans and specifications for the home must be approved by the USDA.
- You must provide a down payment and pay closing costs, similar to a traditional mortgage.
If you’re thinking of applying for a USDA construction loan, get in touch with us today.
How to Get a USDA Construction Loan?
The USDA construction loan is a straightforward process, but there are certain requirements that must be in place to qualify.
Here’s the list of what is most important:
- Financials: You must provide two years of tax returns, w-2s, and pay stubs to demonstrate your ability to repay the loan.
- Credit Score: You must have a minimum credit score of 620 or higher in order to qualify.
- Property Qualification: The property must be located in a rural area and meet the specified requirements of the USDA.
- Income: You must meet the income requirements specified by the USDA.
- Residency: You must be a permanent resident of the United States in order to qualify.
- Debt-to-Income Ratio: Your monthly payments must not exceed 41% of your monthly income.
- Appraisal: A professional appraisal of the property will be required.
- Mortgage Insurance: Private mortgage insurance must be obtained.
Once the requirements have been met, the next step is to submit a loan application to the USDA and wait for the loan to be approved. Once the loan is approved, the funds can then be used to begin the construction process.
The best part? USDA construction loans come with flexible repayment terms and competitive rates. If you want to ensure everything is done right the first time, from preparing loan documents to finalizing your home loan, call us, and we’ll get that loan application underway!
Frequently Asked Questions
Does USDA do construction loans?
The USDA offers construction loans through its Single Family Housing Direct Home Loan program for low-income individuals and families in rural areas to build or repair homes.
The program provides 100% financing, allows the use of own labor, and converts to a 30-year fixed-rate loan after completion. Eligibility is based on property location, income, and credit.
How many lines of credit do you need for a USDA loan?
To get a USDA loan, you usually need 2 active credit lines in good standing for at least a year, such as credit cards, mortgages, auto loans, personal loans, or other debts.
The combined balance should be at least $2,000, and neither should have any delinquencies or defaults in the past year. It’s crucial to have a solid credit history of being eligible for the USDA loan, so check your credit lines before applying.
Can you negotiate closing costs with the USDA loan?
Negotiating closing costs is totally possible with a USDA loan. These costs, such as appraisals, title searches, and others, are part of the loan process, and USDA loans have lower closing costs than conventional loans but with borrowing limits.
To negotiate, discuss options with your lender, such as an interest rate buydown or extended loan term, or ask the seller to pay some costs. This could help lower the overall cost of your loan.
