You can do a lot with the USDA loan, which many people don’t realize. It’s a common myth to believe that you can only buy an existing home with this loan program. In reality, you can even buy land with it. However, you will need to have plans for that land. You will have to build a home on it pretty much right away in order to qualify for USDA financing.
Finding the Right Land
Just like buying a house with USDA financing, you have to find the right one. Just as the USDA requires homes to be modest in nature, the same is true for any lot you purchase. It must be within the average size for the area. It can be smaller than that, but it cannot be larger or considered luxurious. The USDA program is to help low to middle income families buy the land and home they need. It’s not meant for investment purposes or to help the wealthy buy their homes.
The USDA Land Loan
The USDA land loan works a little differently than the loan you would use to buy a home. First, you must prove you are building a home on the land. If you don’t have plans to build a home or will not start right away, the USDA loan isn’t an option. You have 180 days to complete the home on the lot purchased with USDA funding. When you are done, the USDA loan will cover the home and the land it is on. Even better, you won’t have to put any money down and you can wrap your closing costs into the loan. You will have to pay the upfront guarantee fee, unless you wrap it into the loan as well, though.
Are You Eligible?
Before the lender processes your loan, they will need to determine if you are eligible. In short, this means if you make too much to qualify for the USDA program. While that sounds crazy to make too much money to qualify for a loan, it’s reality. The USDA reserves their no down payment program for borrowers that cannot secure funding anywhere else. They start by determining your income. You’ll see the maximum income you can make by looking at their guidelines here. Keep in mind, the total income that the USDA uses is that of the entire household. If you have adults living with you that make an income, they’ll have to include their income in the calculations. In other words, your total household income cannot exceed 115% of the average income for the area. If it does, you’ll likely be eligible for other loan programs and not the UDSA loan.
How to Get Approved
Once you know you are eligible, it’s time to see if you qualify for the loan. When you want to buy land with a USDA loan, you have to go through the same process you would go through when buying an existing home. The lender requires a loan application, which indicates the amount of money you request as well as its purpose. In this case, you’d mark that it’s to buy a lot where you will build a home. From there, the lender will process the application.
They start by pulling your credit. The USDA requires a minimum 640 credit score in order to qualify for the program. If you have at least a 640, the lender will ask for further documentation to prove your income, assets, and liabilities. You will need to provide the lender with your last two paystubs, last two years’ of W-2s, and any asset statements if you plan to pay the closing costs on your own. You’ll also have to provide the lender with details about the land you want to purchase. This includes what you intend to do with the land. As we stated above, if you don’t plan to build on the land anytime soon, a USDA loan will not be an option. Luckily, buying land with the USDA loan is fairly easy as long as you will build on the land fairly quickly. The loan will then cover both the lot and the home, giving you flexible financing and a great way to become a homeowner.