A Comprehensive List of USDA Construction Loan Lenders

In theory, it’s a great idea: A USDA construction loan, with no money down, to finance your new home build. 

In practice, it’s hard to make this kind of financing work. For one thing, there aren’t many USDA construction loan lenders.

And, once you’ve found a lender, it’s hard to find a building contractor who has the USDA’s approval.   

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What is the USDA Rural Development Loan Program?

The USDA Rural Development Loan Program is a government initiative designed to boost living standards in rural communities. It achieves this goal by offering cost-effective loan options that make homeownership more accessible and support community enhancement projects.

Key Features

• Homeownership Financing: The program provides loans that help individuals and families purchase homes in rural areas. This focus on affordable mortgage options opens doors to a wider range of potential homeowners.
• Home Improvement Loans: These loans are available for existing homeowners who need funds to repair or enhance their properties. This option ensures that homes remain safe and comfortable over time.
• Guaranteed Loans: USDA-backed loans are also available through approved lenders. This means the government guarantees a portion of the loan, making it less risky for lenders and more accessible for borrowers.

Aiding Community Development

Beyond individual loans, the program encourages broader community growth. By facilitating construction loans, the USDA supports infrastructure improvements that benefit entire neighborhoods.

This comprehensive approach not only aids individuals in securing homes but also fosters robust community development, ultimately enhancing the quality of life for rural inhabitants.

What is the Mission of the USDA Rural Development Loan Program?

The USDA Rural Development Loan Program is dedicated to enhancing the quality of life in America’s rural areas. Its primary mission is to make homeownership more attainable by offering affordable financing solutions. This initiative not only seeks to empower individuals and families by providing them with the means to own homes but also strives to stimulate economic growth in rural communities. By supporting homeownership and facilitating community development, the program plays a crucial role in fostering sustainable and thriving rural economies.

List of USDA construction loan lenders

Here’s a list of active USDA construction loan lenders for 2023, as reported by USDA’s website.

Is it hard to get a USDA construction loan?

It can be quite hard to get a USDA construction loan. Compared to USDA loans for existing homes, only a few lenders offer USDA construction mortgage loans.

But a bigger hangup is finding a USDA-approved building contractor. 

Borrowers who have already chosen a builder often learn the USDA hasn’t approved their builder and won’t move forward with the loan. And many builders — especially good ones who have plenty of work — don’t have time to go through the process of getting USDA approved.

That’s why a lot of people who try to get a USDA construction loan eventually abandon the idea.

Instead, they’ll find an existing home that qualifies for a USDA loan with no money down. These loans are much easier to find. Most lenders offer them. 

People who still want to build their own home instead of buying an existing home can usually find other types of construction loans if they can’t make a USDA construction loan work. 

Pros and Cons of USDA Construction Loans

Pros:

1. No Down Payment Required:
   • This loan allows you to finance up to 100% of the property’s value, eliminating the need for a hefty down payment, often a significant barrier to homeownership.
2. Competitive Interest Rates:
   • USDA loans typically offer lower interest rates than conventional loans, reducing the overall cost of borrowing over the life of the loan.
3. Flexible Credit Requirements:
   • These loans have more lenient credit requirements, making them accessible to a broader range of borrowers, even those with less-than-perfect credit scores.
4. One-Time Close:
   • The one-time close feature combines the construction loan and permanent mortgage into a single loan process, saving both time and money.
5. Supports Rural Development:
   • By encouraging homeownership in rural areas, these loans help stimulate economic growth and development in less densely populated communities.

Cons:

1. Geographic Restrictions:
   • Available only in designated rural and some suburban areas, USDA loans limit options for those preferring urban settings.
2. Income Limits:
   • Designed for low- to moderate-income households, there are strict income limits based on location and family size, potentially excluding higher-income earners.
3. Mandatory Guarantee Fee:
   • Although lower than private mortgage insurance on conventional loans, USDA loans require an upfront guarantee fee and an annual fee, increasing the overall cost.
4. Longer Processing Times:
   • Due to government involvement and additional approval steps, the application and closing process can take longer than conventional loans.
5. Strict Property and Construction Standards:
   • Properties and construction plans must meet specific USDA standards, which can be more stringent, possibly limiting construction options or requiring more upfront work.

In summary, while USDA construction loans offer significant advantages like no down payment and competitive interest rates, they also come with challenges, including geographic and income limitations and more extended processing times. Understanding these factors can help you determine if this loan is the right fit for your home-building journey.

USDA construction loan requirements

At first glance, USDA construction loans have many of the same requirements as USDA loans for existing homes:

• The borrower must qualify: Usually, this means having a credit score of around 640 and a debt-to-income ratio of 41% or lower. Also, USDA borrowers must meet income limits, meaning they can’t earn more than 115% of their area’s median income for their household size
• The area must qualify: The USDA insures loans only in USDA-designated rural areas, but the USDA’s definition of rural is more inclusive than you might think. Most U.S. ZIP codes qualify  

But USDA construction loans have their own, more specific, requirements, too: 

• The contractor must qualify: To be USDA-approved, the building contractor must have at least two years of experience building single-family residences. The contractor also has to carry at least $500,000 in liability insurance and have a satisfactory credit rating. The USDA will run a background check on the contractor; a builder who has previous felonies, for example, won’t qualify
• The building plans must qualify: The building plan must align with the USDA’s property requirements. The project must also meet or exceed the International Energy Conservation Code. The builder must be willing to provide a construction warranty that lasts at least one year 

If you can find a USDA construction loan lender, your loan officer may know some building contractors in the area who meet the USDA’s standards. An experienced lender, paired with a builder who knows about USDA loan-financed building projects, can make this process more seamless for you.

How to Determine if a Property Qualifies for a USDA Construction Loan

Wondering if a property is located in an eligible area for a USDA Construction Loan? Follow these simple steps to find out:

1. Visit the USDA Website: Head over to the official USDA website. This is the most reliable source of information regarding eligibility areas.
2. Access the Eligibility Map: Once on the site, locate the section for USDA Loans. Here, you’ll find a link to the eligibility map, which is a vital tool for this process.
3. Input Property Details: Enter the exact address of the property you’re interested in. This will ensure accurate results for the area.
4. Review the Results: The map will clearly indicate whether the property falls within an eligible area. Eligible locations are usually shaded or marked distinctly.

By using the USDA’s official map, you can quickly verify if your desired property qualifies for the loan. This straightforward tool can help you make informed decisions about your next steps in the purchasing process.

USDA construction loan process

If you’re thinking about using a USDA construction loan, here’s a step-by-step guide that integrates the entire process:

• Step 1 — Find the right lender: The USDA construction loan journey should begin by finding a lender to partner with throughout the process. See the list above to find USDA construction loan lenders near you. Try to compare offers, if possible, since different lenders will quote different rates.
• Step 2 — Choose a reputable builder: Once you’ve secured a lender, the next step is selecting a builder who meets the USDA’s eligibility requirements. This choice is crucial as it lays the groundwork for a successful project.
• Step 3 — Prepare and sign a contract: Collaborate with your chosen builder to prepare a contract that outlines the scope of your project. Once signed, this document formalizes your agreement and sets expectations.
• Step 4 — Close the loan: The lender will examine the loan and approve it if it meets requirements. You can then close on the loan, which paves the way for construction to begin.
• Step 5 — Start construction: Construction will start within 30 days of closing the loan. Your lender will work with the builder to issue funds as needed, ensuring a smooth progression of the build.
• Step 6 — Progress updates: Throughout the construction phase, expect regular updates on the progress of your home. This transparency keeps you informed and allows for any necessary adjustments along the way.
• Step 7 — Complete the project: With a lender and contractor on board, you have the building blocks for success. Trust these experts, but also be sure to ask questions throughout the process, from drafting plans to digging footings to painting the walls. After all, it’s your new home.
• Step 8 — Finalize the loan: As construction begins, your lender will allow the builder to draw funds to pay for construction costs and keep the project moving forward. When the house is finished and inspected, your USDA construction lender will schedule a loan closing. If the project costs less than expected, the extra money will be applied to your loan’s principal.
• Step 9 — Move in and make payments: With the loan closed, it’s your home. You can move in (and start making payments).

Steps 1 and 2 in this process make all the difference. They can lay a strong foundation for the entire project, providing peace of mind as you enjoy your newly built home with secure financing.

What Documentation is Needed to Apply for a USDA Construction Loan?

When applying for a USDA Construction Loan, preparing the appropriate documentation is crucial to smoothing the application process. Here’s a breakdown of what you’ll need:

• Employment Verification: Gather documents that clearly demonstrate your employment and income history, such as recent pay stubs.
• Income Records: W-2 forms and recent tax returns serve as vital proofs of your income. These help verify that you meet the financial requirements for the loan.
• Self-Employed Applicants: If you’re self-employed, be prepared to submit your federal income tax returns for the past two years. This provides a comprehensive view of your earnings and financial stability.

By organizing these documents beforehand, you can expedite the loan process and demonstrate your financial readiness to lenders.

What is a USDA single-close construction loan?

A USDA single-close construction loan is a loan that closes one time instead of two.

Some construction loans come with two and sometimes three entirely different loans:

1. Land purchase
2. The short-term construction loan
3. Refinancing into a permanent 30-year fixed loan

This process is more difficult because it involves two or three applications, approvals, signings, and most importantly, multiple sets of closing costs.

A USDA single-close loan wraps the land loan, short-term construction loan, and permanent loan into a single loan and process. The loan funds the construction of the home then converts into a permanent fixed loan with a low rate when construction is complete.

This is why these are also called “construction to permanent” loans.

This process saves the borrower thousands in closing fees and months of paperwork, and is the preferred method for construction financing today.

Can USDA Construction Loans be used to finance the purchase of land?

Absolutely, USDA Construction Loans offer a unique opportunity to finance both the land purchase and home construction simultaneously. This government-backed loan is specifically designed to assist low- to moderate-income individuals in achieving homeownership in rural areas. By combining the purchase of land with the building process into one streamlined loan, it eliminates the need for a separate land loan, which can often be cumbersome.

This approach not only simplifies the process but also aligns with the USDA’s mission to make homeownership more accessible in rural communities. By leveraging a single-close loan, borrowers can effectively manage their home building journey from start to finish with ease.

How Builders Can Benefit from the USDA OTC Construction Loans Program

Builders looking to broaden their horizons will find the USDA OTC Construction Loans program a compelling opportunity. This initiative allows builders to tap into the rural and suburban housing market by working alongside borrowers who are eligible for USDA Rural Development Loans.

Expand Your Customer Base

Collaborating with individuals and families eligible for these loans can significantly increase a builder’s clientele. By entering this market, builders can cater to the home construction needs of those looking to reside in rural and suburban areas, which are often overlooked by conventional financing options.

Financial Incentives and Features

A standout feature of the program is the potential for builders to offer seller contributions towards the borrower’s closing costs. This not only makes construction projects more financially accessible for the homebuyer but also boosts the likelihood of closing a sale. Such a benefit diminishes the barrier of high upfront costs, making new homes more appealing to potential buyers.

Support Community Growth

By participating in this program, builders not only increase their own business prospects but also contribute to the broader goal of rural development. The USDA Rural Development Loan program is dedicated to enhancing the quality of life in these communities by offering affordable financing for home construction.

Drive Economic Development

Builders involved in the program play a pivotal role in spurring economic growth. By providing affordable housing options, they help foster community development. This, in turn, leads to healthier, more sustainable local economies.

In summary, builders engaging with the USDA OTC Construction Loans can expect an expanded customer base, increased sales potential, and the satisfaction of contributing to community improvement. It’s a win-win for both builders and the communities they serve.

What Types of Properties Can Be Financed with USDA OTC Construction Loans?

USDA OTC (One-Time Close) Construction Loans offer a diverse range of financing options for various property types. These loans are versatile, allowing families and individuals to build the home that fits their lifestyle and preferences. Here’s a closer look at what types of properties can be financed:

• New Site-Built Homes: Customize a traditional stick-built home from the ground up.
• Modular Homes: Finance the assembly of modular homes, which are partially constructed in a factory setting before being assembled on-site.
• Manufactured Homes: Options include financing for new double-wide or triple-wide manufactured homes.
• Innovative Construction Methods:
  • SIP (Structural Insulated Panel) Homes: These energy-efficient homes utilize prefabricated panels for quick construction and lower utility costs.
  • ICF (Insulated Concrete Form) Homes: Known for their strength and insulation, these homes are built using stacked, reinforced concrete forms.
• Unique Home Styles:
  • Barndominiums: These structures combine the features of a barn with those of a condo, offering spacious and flexible living options.
  • Log Cabins: Ideal for those desiring a rustic aesthetic in a modern home.

This flexibility enables borrowers to select the home style that perfectly matches their needs and dreams, all while taking advantage of favorable USDA loan terms.

Common Questions About USDA OTC Construction Loans

When exploring USDA OTC (One-Time Close) Construction Loans, potential borrowers often have several important queries. Here’s a breakdown of the most frequently asked questions:

• What types of properties are eligible? USDA OTC Construction Loans typically finance single-family homes in designated rural areas. The property must meet specific guidelines set by the USDA, which focus on enhancing development in rural zones.
• What are the credit requirements? Borrowers must meet certain credit standards to qualify. While specific credit score requirements may vary among lenders, a score of 640 or higher is generally favorable.
• Is a down payment required? One of the standout features of USDA OTC loans is that they typically require little to no down payment. This makes them an attractive option for borrowers who meet other qualifications.
• How do interest rates compare to other construction loans? Interest rates on USDA OTC loans are often competitive, matching or improving upon those offered by conventional construction loans. Rates fluctuate with market conditions but are generally appealing due to the loan’s government backing.
• Do construction loans require additional down payments? Unlike traditional construction loans, a USDA OTC loan is streamlined into one closing process, eliminating the need for an additional down payment after the construction phase.
• What types of loans are available? There is primarily one type to consider: the One-Time Close construction loan, which combines the financing for both land purchase and construction.
• Why are USDA construction loans sometimes hard to find? Availability can be limited due to the specific nature of lender participation and the need to align with USDA guidelines. However, they are worth pursuing due to their benefits.
• What are the loan terms? Terms typically range up to 30 years, the same as standard mortgage loans, allowing for predictable repayment schedules post-construction.

Understanding these fundamental aspects of USDA OTC Construction Loans can set potential borrowers on a path to their dream homes in eligible rural areas.

Alternative loan types

Traditionally, financing a new home construction project required two loans: one loan to pay building costs and another loan to serve as a permanent mortgage.

USDA construction loans combine both steps into one 30-year fixed-rate loan. Lenders call these construction-to-permanent loans, or single-close loans. 

If you like the idea of a single-close loan but can’t find the right USDA construction loan lender, you may want to consider buying a fixer-upper instead. The following loan types combine home buying and home renovation costs into one loan:

• FHA limited 203k: This loan combines financing for a home purchase along with financing the cost of limited renovations such as a new roof, new appliances, or cosmetic improvements. This loan is backed by the Federal Housing Administration and requires a down payment of at least 3.5%
• FHA full 203k: The FHA’s full 203k loan can finance a home purchase along with the cost of major renovations and structural repairs. This loan also requires a 3.5% down payment 
• Conventional HomeStyle or ChoiceRenovation loan: These conventional loan programs, from Fannie Mae and Freddie Mac, also combine home purchase and home renovation costs. You’d need to put at least 5% down

And, of course, you could always buy a newer, existing home by using an easy-to-find USDA Guaranteed loan with no money down or a standard FHA loan with only 3.5% down.

USDA construction loan FAQ

Flexible Financing with a USDA Construction Loan

If you’re exploring ways to secure additional financing alongside your USDA Construction Loan, you’re in luck. You can indeed access extra funds, offering a practical solution for needs such as consolidating debt or furnishing your new home.

Here’s how it works:

• Extra Funds Available: Qualified borrowers can tap into up to $50,000 in additional financing. This sum is accessible either before or during the loan closing process.
• No Additional Credit Inquiry: The approval for this extra amount relies on your initial credit report. This means you won’t face the risk of lowering your credit score with another inquiry.
• Seamless Integration: The extra financing is seamlessly incorporated into your loan evaluation process, ensuring a smooth approval journey.

This flexibility empowers you to use the funds as you see fit, whether it’s sprucing up your new space or managing existing debts. Enjoy the convenience and peace of mind knowing that the extra financing is there to support your financial objectives.

How Do Interest Rates for USDA Construction Loans Compare to Other Construction Loans?

When considering construction loans, it’s essential to understand how interest rates stack up across different options. USDA Construction Loans often feature competitively low-interest rates, making them an attractive choice for many borrowers. Here’s a more detailed comparison:

1. Competitive Rates: Generally, USDA Construction Loans offer rates that are on par with or even lower than those of conventional construction loans. This is particularly beneficial for borrowers seeking affordable building solutions.
2. Variable Influences: Keep in mind that interest rates can fluctuate based on several factors, including:
   • Credit History: Borrowers with strong credit scores typically receive more favorable rates.
   • Loan Amount: Larger loans may come with higher rates, depending on risk assessments.
   • Market Conditions: Rates are subject to change according to current financial market trends.
3. Government Backing: Since USDA Construction Loans are backed by the government, they often have advantages in terms of stability and predictability compared to some private loan options.

To get the most accurate and personalized rate information, it’s advisable to speak directly with a qualified lender. They can provide insights tailored to your specific financial situation and help you make an informed decision.

A nice benefit that can play hard to get

Home buyers with less-than-stellar credit who earn moderate incomes can still get affordable mortgages through the USDA loan program — if they’re buying in qualifying rural areas.

USDA construction loans extend these same benefits to people who want to build brand new homes. But navigating the process is too difficult for many borrowers.

However, understanding the benefits can simplify the decision-making process:

1. Single Loan for Construction and Mortgage: With a USDA OTC Construction Loan, you can finance both the construction and the long-term mortgage with a single loan. This eliminates the hassle of multiple closings, streamlining your path to homeownership.
2. Zero Down Payment: One standout feature is the absence of a down payment requirement. This makes it easier for prospective homeowners to step into their new homes without the burden of significant upfront savings.
3. Financing Closing Costs: Apart from bypassing a down payment, these loans offer the flexibility to finance your closing costs. This reduces the initial financial pressure, allowing you to manage your budget more effectively.
4. Rural and Suburban Eligibility: USDA OTC Construction Loans are available in designated rural and suburban areas, perfect for those dreaming of a home away from the city’s hustle and bustle.

By focusing on these key benefits, borrowers can better steer through the complexities and make informed decisions about building their dream homes.