If you want to know how to buy land and build a house with no money down, a USDA construction loan could be ideal.
USDA construction loans can finance the land, build your home, and serve as your long-term mortgage. They essentially roll three loans into one. Plus, there’s no down payment required and only one set of closing costs.
However, these loans can be hard to find. You also need to be eligible and build in a qualified rural area. Read on to learn more about USDA construction loan rules, rates, and other loan types.
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A USDA construction loan is a mortgage that allows borrowers to buy land and build a home with one loan and one monthly payment. This program, which is backed by the U.S. Department of Agriculture, is similar to a standard USDA loan. The big difference is that USDA construction loans combine financing for the land, construction, and a fixed-rate mortgage into a single loan product.
If you’re asking yourself, ‘Can I buy land with a USDA loan?’ the answer is yes. A USDA construction loan allows you to purchase both the land and the home. But some restrictions apply. For example, the land must be in a USDA-approved location. These areas must be “rural in character,” though many small towns and suburbs qualify.
loan-to-value ratio (LTV), which means you won’t need 100% financing,” Duncan continues. “This increases your possible equity position and will lower your payment further than a borrower purchasing new land or paying full price for the land.”
USDA construction loans work by offering simplified financing through its Single-Family Housing Guaranteed Loan Program. So rather than obtaining two separate land and construction loans to buy land and pay for construction costs, borrowers can use this single-close construction loan to pay for everything.
USDA construction loans can assist with covering expenses such as:
Government-backed mortgage programs often come with numerous requirements that both the property and the borrower must meet. USDA construction loans are no different. In fact, because of the complexity of this land loan, qualifying can be challenging for many potential borrowers.
To be eligible for a USDA construction loan, you must meet a number of guidelines, including certain credit score and household income requirements.
Your lender will also look for 12 to 24 months of clean, unblemished credit history, no gaps in your household income, no mortgage forbearance, and no late or missing rent payments.
“Basically, when qualifying for USDA loan loans, you want to have the cleanest credit, income, and debt-to-income ratio possible to get this loan,” suggests Brandon Mushlin with BuildBuyRefi.com.
In addition to the borrower requirements for a USDA construction loan, the property you intend to buy must also comply with a number of other guidelines before the USDA will approve your loan application.
In addition, the types of homes eligible to be built using a USDA one-time construction loan are limited to single-family homes, manufactured homes, and eligible condominiums.
“Second or vacation homes, homes intended to be used for short-term or long-term rentals, accessory dwelling units, self-built homes, commercial buildings, and mixed-use construction are not eligible,” adds Richie Duncan, senior loan officer with Nationwide Home Loans Group.
For a USDA new construction loan, the project’s contractors must meet certain qualifications. These USDA contractor requirements include:
USDA loans are designed to help moderate- and low-income Americans become homeowners. They do this by offering affordable financing for real estate in designated rural areas. So if you’re wondering how to finance buying land and building a house, a USDA construction loan could be an excellent option. Still, it’s important to understand the pros and cons of the USDA construction loan to make the best decision for your financial situation.
The biggest benefit of a USDA construction loan is that you can buy land, build a new home, and finance that finished home over 30 years — all in one single-close construction loan.
“You can either find land to place under contract, use current land you already own, or use land deeded over to you from your family to combine with your chosen and approved builder to construct your home,” explains Mushlin.
The biggest drawback to a USDA construction loan is that they can be difficult to find and are rarely offered by lenders.
Although there are big potential benefits to a USDA construction loan, it can be difficult to find lenders offering them.
“Even the largest of lenders don’t offer USDA construction loans for many reasons. These include factors like a longer closing time, higher risk to underwriting and investors, having to lock the rate longer, and needing to communicate with many moving parts over a long period,” Duncan says.
An online search for “USDA construction loan lenders” should yield some lenders you can investigate.
“I recommend choosing a lender that knows exactly what this process involves and has closed these loans before. You want someone transparent, upfront, and who doesn’t sugarcoat or gloss over the details of what you’re looking for,” advises Mushlin.
As mentioned earlier, USDA construction loan rates will likely be higher than rates offered for a separate lot loan, a construction loan, or a 30-year mortgage loan.
To apply for and obtain a USDA construction loan, you must complete the following three steps. This process ensures that both the borrower and the contractor meet the specific requirements set forth by the United States Department of Agriculture.
You must first come to an agreement with a USDA-approved contractor who must meet the following requirements:
With your contractor agreement in hand, it’s time to start looking for lenders to get pre-approval for a loan. Remember that you need a lender who is a member of the USDA loan program and specializes in USDA construction loans.
Prepare to disclose details such as your income, proof of employment, an overview of your assets and debts, your DTI, and undergo a credit evaluation to obtain the initial mortgage approval.
After you’ve gathered all the necessary information, you’re ready to send off your USDA loan application.
Before submitting your application, confirm your contractor and the location of your property, as these details are required for qualification. Depending on your specific circumstances, the loan process can take up to 60 days to complete.
Here are a few other home construction and renovation loans options to consider if you’re having trouble finding USDA loans or want to widen your search.
VA one-time-close construction loans are a unique type of mortgage designed to benefit veterans and active-duty military members. The Department of Veterans Affairs, a federal organization in charge of assisting the military community, is responsible for guaranteeing these loans.
Unlike conventional loans, VA one-time close construction loans can provide up to 100% financing. This means that qualified borrowers do not have to make a down payment, which can make homeownership more accessible. They share similarities with USDA loans and are tailored to those who have served in the military, acknowledging their contribution to the nation.
The Federal Housing Administration (FHA) backs the FHA one-time close construction loan. It’s an option that particularly appeals to first-time home buyers.
With the possibility of putting down as little as 3.5%, it offers an accessible route to homeownership for those who might not have a significant amount of savings. Additionally, FHA loans are known for their lenient credit guidelines, making them more accessible to a broader range of buyers, including those with less-than-perfect credit scores.
Conventional one-time close construction loans are secured by government-sponsored enterprises, such as Fannie Mae and Freddie Mac. These loans differ from government-backed options in that they typically require higher qualifications.
Applicants must usually have a credit score of 620 or higher and be prepared to put at least 5% down. These requirements make conventional loans a viable option for borrowers with stronger financial standing, reflecting the lower risk to the lender.
The FHA 203k loan is a specialized program within the Federal Housing Administration’s offerings. It’s designed to support buyers looking to purchase and renovate a fixer-upper home.
What sets this loan apart is its ability to finance both the purchase price of the home and the cost of necessary renovations. This dual-purpose function can make it easier for buyers to transform a property in need of TLC into their dream home. With requirements of only 3.5% down and a minimum 580 credit score, it opens up opportunities for a wide array of potential homeowners.
The traditional USDA home loan is designed to support rural home buyers. Unlike the one-time close construction loans mentioned earlier, obtaining a USDA rural development loan often involves getting a separate lot loan and/or construction loan.
The right type of construction loan depends on your location, home building budget, credit score, and down payment, among other factors. You should ensure you’ve explored all your options and found the best loan before signing on.
Yes. The USDA offers a combination construction-to-permanent loan, also called a single-close loan. This loan combines financing for the lot, new construction, and a fixed-rate mortgage into a single loan.
Is there a USDA land loan?Yes. The USDA Rural Housing Site Loan can be used to purchase land on which you’ll construct a single-family home. USDA land loans are only available to low- and moderate-income families. The maximum allowable income is 115% of the borrower’s area median income (AMI).
Can you get 100 percent financing on a construction loan?Richie Duncan with Nationwide Home Loans Group explains that a USDA construction loan offers 100 percent financing with no down payment required, so long as you are well-qualified for credit and meet income and other requirements.
Is it easier to get a construction loan if you already own the land?Duncan says it’s neither easier nor more difficult. But owning your land outright can reduce your loan-to-value ratio, which means you won’t need 100 percent financing.
Can you build a house on land you are still paying for?If you have an outstanding lot loan, that loan will need to be paid off and rolled into your new USDA construction loan.
What disqualifies a home from USDA financing?A USDA construction loan can only be used to finance single-family homes, manufactured homes, and eligible condominiums. Vacation or second homes, short-term and long-term rental properties, accessory dwelling units, a home you build yourself, commercial buildings, and mixed-use construction do not qualify for USDA financing. In addition, the lot must be in a USDA-eligible rural area.
What credit score do you need for a USDA construction loan?Most lenders require a minimum FICO credit score of 640 to qualify for a USDA construction loan.
How long does a construction loan last?A USDA construction loan typically converts to a 30-year fixed-rate mortgage. At least 220 days after construction has been completed and after you’ve made six on-time payments, you may be able to lower your interest rate by refinancing via the USDA Streamline Refinance or another refi program.
How do I apply for a USDA construction loan?You can apply for a USDA construction loan with USDA-approved lenders who offer this loan program. Search online for available lenders.
Now that you know you can buy land with a USDA loan, a USDA construction loan can be an attractive and affordable option for buying land and building a home.
But these hard-to-find loans aren’t available to everyone. Luckily, there are plenty of other construction loan programs on the market.
Explore the different types of construction loans available, then talk to lenders about which program can best meet your needs.