Understanding USDA Home Loans for Building a New House

No down payment with USDA new construction.

USDA new constructionThe USDA loan program is a government-backed loan program that helps rural homeowners qualify for loans. The program is designed to help low- and moderate-income families purchase homes in rural areas.

USDA loans are available through the USDA Rural Development office. To qualify for a USDA loan, you must have a credit score of 640 or higher and an income that does not exceed 115% of the median income for your area.

The USDA guidelines to build a home are no different from the purchase of an existing home. The borrower must meet the USDA income limits and the property must be located in a designated rural area. The USDA provides a lookup tool (click on Single Family Housing Guaranteed) to help with the income and area requirements. Chances are, you will be financing the construction with a USDA Guarantee loan, not the USDA direct program.

The land and build loan program can help you finance your new home. To qualify for the loan, you must work with a USDA-approved lender and meet certain eligibility requirements. The loan program is designed to help you finance the purchase of land and the construction of a home or other dwelling.

What is a Construction Loan From the USDA?

A construction loan is a short-term loan used to finance the construction of a home or other real estate project. Construction loans are typically short-term loans with a term of one year or less. The USDA construction loan program is a government-backed program that provides loans for borrowers who want to build a home on land that is owned by the Department of Agriculture.

The USDA construction loan program is a one-time close construction loan, which means that the borrower only has to apply for and close on one loan to finance both the land and the construction of the home.

What Is the Process for USDA Construction Loans?

Construction loans are a specific type of mortgage loan used to finance the construction of a new home. USDA construction loans are available through the USDA single family housing loan program. These loans require no down payment and the closing costs can be included in the loan.

Construction-to-permanent loans are a single loan that funds both the construction of the home and the purchase of the home when it is complete. USDA construction loans require that the borrower use a USDA approved builder, and the home must be your primary residence.

New home built with a USDA loanTo be eligible for a USDA construction loan, you'll need to meet certain requirements, including being a U.S. citizen or resident, having a stable income, and being able to provide documentation of your income and assets.

You'll also need to meet eligibility requirements for the type of loan you're applying for. You can apply for a USDA construction loan through an approved USDA lender. The loan process is straightforward, and you can typically get a loan approval within a few weeks.  

What Is Covered in USDA Construction Loans?

A USDA construction loan is a loan that is offered to rural property owners who are looking to build a new home. This loan is a combination of a construction loan and a mortgage loan, and it is offered by the United States Department of Agriculture.

The USDA Construction Loan includes the cost of the land, the construction of the home, and the permanent mortgage.

The USDA home construction loan includes the following:

  • Builder's insurance
  • Building costs
  • Buying or paying off the plot of land
  • Construction administrative fees
  • Design plans
  • Inspection fees
  • Landscaping costs
  • Permits
  • Utility and septic costs

Down Payment Requirement and Closing Costs

Most construction loans require some down payment, but the USDA construction loan does not require a down payment. The USDA construction loan is truly 100% financing.

Although, not required, proceeds from the sale of a home may be applied to a construction loan to reduce the monthly loan payment or get under the debt to income ratio.

With a one-time close construction loan, closing costs are only paid once, and since a single closing is involved, there is only one required qualification and one appraisal.

Credit Score Requirement for a USDA Home Loan

Most lenders require a minimum credit score of 640 for a USDA new construction mortgage. Lenders often need a minimum of 12 to 24 months of blemish-free credit, no income gaps, no mortgage forbearance, and no late or missed rent or mortgage payments.

A USDA home loan is a great way to finance 100% of your home purchase. You can buy a house with no down payment and still get a very low interest rate. In order to qualify for this type of loan, you need to have a credit score of at least 640.

This is a bit higher than the 580 that is required for an FHA loan, but it is still attainable for many people. There are a few things that you can do to help improve your credit score if it is not quite high enough. One thing that you can do is to make sure that you make all of your payments on time.

Another thing that you can do is to keep your credit card balances low. If you can do these things, then you should be able to get your credit score high enough to qualify for a USDA home loan.

Interest Rates for USDA New Construction Loan

When it comes to interest rates for USDA new construction loans, there are a few things to keep in mind. First, the type of loan you choose will affect the interest rate you pay.

There are two types of USDA new construction loans: direct loans and guaranteed loans. Direct loans are made by the USDA to eligible borrowers, while guaranteed loans are made by private lenders and backed by the USDA. Interest rates for direct loans are set by the USDA, while interest rates for guaranteed loans are set by the lender.

Interest rates for both types of USDA new construction loans are generally lower than traditional mortgage rates. This is because the USDA offers incentives to encourage development in rural areas. For example, the interest rate for a direct loan may be 1% lower than the going rate for a traditional mortgage.

Contractor requirements include:

  • have a satisfactory credit history and be free of open judgments
  • must have a construction or contractor license.
  • A minimum of two years of experience constructing single-family houses is required.
  • Must have a satisfactory credit history.
  • Must pass a background check.
  • Commercial liability insurance of at least $500,000 is required of the contractor.

Additional Requirements

  • You cannot have filed for bankruptcy within the past two years.
  • Minimum income and USDA geographic location must be satisfied.
  • The builder must issue a warranty on the new home.
  • Any money left after construction is complete must be transferred to the principle of your loan.
  • The USDA must approve the selected contractor(s), who must possess the necessary licenses and insurance, as well as a minimum of two years' experience constructing houses.
  • Your debt-to-income ratio (DTI) should not be more than 41%.

Ineligible properties

Second or vacation homes, investment properties, are ineligible for a USDA new construction loan. Single family dwellings, manufactured homes, and eligible condominiums only.


In conclusion, a USDA loan can be a great option for those looking to build their dream home. The process is simple and there are many benefits to taking out a loan through the USDA. If you are interested in learning more, be sure to visit the USDA website or speak to a representative today.

SOURCE: USDA Combination Construction-to-permanent

Recommended Reading

  1. Learn the Loan Requirements for a USDA Guaranteed Loan
  2. USDA Loan Repair Program Requirements: How to Qualify
  3. Guaranteed Loan vs Direct Loan: Which is right for you?