What Is A USDA Construction Loan?
USDA construction loans, as the name implies, are mortgage loans guaranteed by the USDA; however, they are not the same as traditional USDA home loans in that they serve as construction-to-permanent loans.
USDA loans are attractive because they require no down payment. However, in order to be eligible for this kind of loan, you must build in an area of the nation that the USDA considers rural.
USDA construction loans are not created by the government organization, even though they are insured by it. You must apply through a private mortgage lender if you wish to apply for one of these loans. The problem? Locating a mortgage lender who originates USDA construction loans can be challenging at times. At this time, Rocket Mortgage® does not offer USDA loans.
You can learn more about how these loans work at the USDA’s Single-Family Housing Guaranteed Loan Program home page.
How Does A USDA Construction Loan Work?
Usually, in order to finance the purchase of the land for your home and the building of the property, you would need to obtain a construction loan before beginning to build. After that, you would switch to a permanent mortgage, usually a 30- or 15-year fixed-rate mortgage, and make consistent monthly payments to repay your home loan.
There are differences between other loan types and the USDA construction loan. You will only need to take out one loan in total to use the USDA construction loan. Your loan will start out as a construction loan. After construction is finished, the loan will become a permanent mortgage, typically with a fixed interest rate. After that, you would repay the loan with regular monthly mortgage payments plus interest.
Pros And Cons Of USDA Construction Loans
Like all mortgage kinds, applying for a USDA construction loan has its benefits and drawbacks.
USDA Construction Loan Pros
The following are a few advantages of applying for a USDA construction loan:
- With this loan, you can finance the construction of a home and its acquisition with a single loan and a single closing date. You can apply for a single loan that converts from a construction loan to a regular mortgage loan, saving you the trouble of first getting a construction loan and then a mortgage loan.
- No down payment. USDA construction loans are eligible for no money down, which is advantageous for purchasers who haven’t saved much money.
- Flexible requirements, though it will vary by lender. Generally speaking, if your FICO® credit score is at least 640, lenders will approve you for this loan. Your monthly debt payments, which include your new mortgage payment, should not exceed 20 percent of your gross monthly income. (241%)
USDA Construction Loan Cons
A USDA construction loan may come with some drawbacks:
- Locating a lender that creates USDA construction loans can be challenging. You will have to look around until you locate a lender that will cooperate with you.
- The USDA will require you to pay upfront and monthly guarantee fees even if there isn’t a down payment requirement. You will be required to pay an upfront guarantee fee equal to one percent of the total amount of your loans when you close them. If you’re borrowing $300,000, this fee comes to $3,000. Also, there is an annual USDA guarantee fee of 0 that you must pay. 35% of your loan amount.
- Not all buyers qualify for a USDA construction loan. It is mandated by the USDA that you construct a house in a specific rural area.
USDA Construction Loan Requirements
Are you prepared to apply for a USDA construction loan? First, confirm that you fulfill these prerequisites:
The USDA stipulates a number of requirements that the house you are building must fulfill:
- The property must be your primary residence. Using a USDA construction loan to build a vacation house or an investment property is prohibited.
- The house you construct needs to be in a location classified as rural by the USDA. Use this USDA property look-up tool to determine whether the area you wish to build in is considered rural.
- To build your home, you have to hire a contractor that has been approved by the USDA.
For you to be eligible for a USDA construction loan, you also need to fulfill specific income and credit requirements:
- Typically, to be eligible, you must have a minimum FICO® credit score of 640.
- Your debt-to-income ratio (DTI) needs to be lower than or equal to 61.1%.
- Your total income can’t exceed the USDA’s income limit requirements. Depending on where you live, these limits will change; in counties with higher costs, the income limit is higher. However, the maximum annual income that one- to four-member households and five- to eight-member households can make in most counties and still be eligible for a standard USDA loan is $103,500 and $136,600, respectively. Use this USDA income look-up tool to find the income limit in your county.
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The process of requesting and being approved for a USDA construction loan consists of three main steps.
Finding a contractor willing to build your home is the first step. But this contractor must be approved by the USDA. Your contractor must meet certain requirements set forth by the USDA, such as having a minimum of two years of experience building single-family homes, having at least $500,000 in commercial liability insurance, and having a good credit history.
Additionally, you’ll need to locate a USDA-approved lender. Regrettably, only a small number of lenders take part in the USDA’s loan program for construction to permanent financing. You can find a list of approved lenders at USDA. gov.
It’s time to complete your mortgage loan application after you’ve chosen your lender and contractor. This application is available from your lender, and you might even be able to submit it online. Your basic personal information, an estimate of your monthly income, and a list of your debts will be required. Additionally, you will need to consent to your lender checking your credit. You will need to submit copies of your financial records throughout the mortgage application process so that your lender can confirm your income. These consist of copies of your last two pay stubs, two months’ worth of bank account statements, W-2 forms, and the previous two years’ worth of tax returns. After obtaining this data, your lender will submit your loan for underwriting to ascertain your eligibility and the appropriate interest rate.
USDA Construction Loan FAQs
Have a question about USDA construction loans? That’s not unusual. These are a few of the most typical queries that applicants have regarding these loans.
What are the alternatives to USDA construction loans?
You do have options if you are unable to locate a lender or are not eligible for a USDA construction loan.
By applying for an FHA construction loan, you can begin with a construction loan and end up with a permanent mortgage with just one closing date. The largest distinction is that one of these loans requires a down payment, though it could be as little as 3. 5%. Depending on the lender, you might also be eligible with a lower credit score, usually around 580.
A traditional one-time close construction loan is another option. With the exception of a few restrictions, this loan functions similarly to the USDA construction loan. You won’t have to use a contractor approved by the USDA or build in a remote location. You will be required to make a down payment, which normally ranges from 3% to 8% of the total amount.
Additionally, you can combine a standard USDA loan with a construction loan. In this case, you would pay for the construction of your new home’s land and building costs first by closing on the construction loan. You’d then hold a second closing for your USDA loan. It will take multiple closings to complete this, but finding a lender won’t be as difficult as it could be if you were seeking for a USDA construction loan.
Is it difficult to get a USDA construction loan?
Locating a local lender is the largest obstacle to obtaining a USDA construction loan. There won’t be lenders that originate these loans in every region of the nation. Additionally, you will need to fulfill USDA requirements, which include building in an area of the nation that is deemed rural by the USDA.
What do USDA construction loans cover?
The fact that a USDA construction loan covers so many different aspects of financing and building a home is one of its advantages. This loan will pay for the price of purchasing land and constructing your house. However, it also enables you to pay for the price of permits and inspection fees. And after construction is finished, the loan will become a conventional mortgage loan.
Like any mortgage product, USDA construction loans have advantages and disadvantages. You’ll need to assess your personal financial situation and credit history to decide if a USDA construction loan is the best option for you. Additionally, you must confirm that the house you are building is in a rural area as defined by law and that you are able to locate a local lender that originates these specialized loans. Although USDA loans are not currently offered by Rocket Mortgage, our home loan experts are happy to check if there may be a better fit for you.
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Dan Rafter has over fifteen years of experience writing about personal finance. He has contributed to articles for Wise Bread, RocketMortgage, the Chicago Tribune, and the Washington Post. com and RocketHQ. com.
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FAQ
What credit score do you need for a USDA construction loan?
To be eligible for a USDA construction loan, you must also fulfill specific income and credit requirements. Generally, you must have a minimum FICO® credit score of 640. Your debt-to-income ratio (DTI) needs to be lower than or equal to 2041 percent. Your total income can’t exceed the USDA’s income limit requirements.
What are the cons of the USDA construction loan?
The drawback of USDA loans is that they have more limitations than regular mortgages. As a result, many purchasers are unable to meet the stringent income thresholds and geographic prerequisites necessary to be eligible for a USDA new construction loan. Also, it might be challenging to locate a lender that provides this loan.
What is the maximum debt to income ratio for USDA?
In order to qualify for a USDA loan, your debt-to-income ratio (DTI) must be less than 401%. USDA loans have a couple of unique requirements. Initially, you are not eligible for a USDA loan if your household income is greater than 115% of the area median income.
Should I pay off my land before you build?
You might be putting too much money into the deal if you pay off the lot loan before applying for a construction loan. Since construction loans are nearly always “no cash out” loans, it might not be able to receive this money back under terms that are acceptable to the lender.
Read More :
https://www.rd.usda.gov/files/RD-SFH-NewConstructionNotes.pdf
https://www.quickenloans.com/learn/usda-construction-loan