If you want to build a new home, but want USDA financing, you can have your cake and eat it too, so to speak. The USDA 100% financing program offers a single-close program that allows you to build a home with just one loan.
The construction loan part of the program is a temporary loan. This loan provides you with the funds necessary to build the home. At this point, there isn’t any collateral for the lender as there isn’t a home for you to move into yet. Once the home is ready for you to live in it, the loan turns into a permanent mortgage, just as you would get if you bought an existing home.
Finding the Right Contractor
When you use USDA financing to build your home, you’ll need to use a USDA-approved contractor. Not just any contractor will do. Since the USDA offers their guarantee as soon as the closing happens, they want to know that you are using a reputable contractor.
- The contractor has plenty of experience (typically at least 2 years)
- The contractor has the proper license and insurance
- The contractor doesn’t have a negative credit history
- The contractor doesn’t have liens against him
- The contractor can pass a background check
You can either search for a USDA lender on your own or use the help of your USDA-approved lender. If you use a lender that’s handled new construction loans before, they should have a list of builders they’ve used before. They can fill you in on the experience their past borrowers had to help you make your decision for your home.
Qualifying for the Loan
Qualifying for a USDA construction loan works the same as qualifying for a standard USDA purchase loan. The USDA offers 100% financing on properties located within a rural area. In order to qualify though, you must meet the USDA requirements:
- 640 credit score
- 29% housing ratio
- 41% total debt ratio
- Total household income that is within the USDA standards
- Proof that you’ll occupy the home as your primary residence
- Proof that you cannot qualify for any other loan program
The Loan Disbursements
You’ll close the USDA purchase loan just as you would any other loan. The lender then handles the distribution of the funds. They distribute the funds according to the contract drawn up between the contractor and the lender prior to the closing.
The lender handles the payment to all contractors, subcontractors, and sellers (including the seller of the land). All you have to do is worry about making your payments on time. While construction is ongoing on your home, you are only responsible for the interest payments on your loan. This should free up money for you to live elsewhere in the meantime.
Once you can move into the home, your construction loan automatically turns into a permanent mortgage. At that point, the loan is re-amortized to reflect the remaining principal for the remaining term. You then make standard principal and interest payments as you would for a standard purchase loan.
The benefit of the USDA construction loan is that you don’t have to go through two closings. This means you save money on closing costs as well as the headache of dealing with two loans. You only have to qualify one time, so you don’t have to worry that you might not qualify for permanent financing once the home is built. Just like any other USDA loan, you are free to shop around with different lenders to find the one with the most attractive terms.