Can You Build a Home With a USDA Loan?
Tags: mortgage
Yes, you absolutely can! For many aspiring homeowners in the Wichita area, the dream of building a custom home feels out of reach due to the high down payment requirements of traditional construction loans. However, a USDA loan can be a game-changer, allowing you to build your custom home from the ground up with potentially no money down. At Sharp Homes, we’ve learned the importance of understanding financing options from the outset. With this in mind, we’re dedicated to providing valuable information to help make your first step as easy as possible. Let’s explore how you can use a USDA loan to build the perfect home for your family.
What Is a USDA Loan?
A USDA loan, also known as a Rural Development Guaranteed Housing Loan, is a mortgage option offered by the U.S. Department of Agriculture. Its primary goal is to promote homeownership in less densely populated areas. The most attractive feature for most borrowers is that it requires $0 down payment.
How Do USDA Loans Work?
Contrary to what some believe, the USDA doesn’t lend money directly to you in its most common program. Instead, it guarantees the loan for a private lender (like a bank or mortgage company). This guarantee reduces the lender’s risk, allowing them to offer highly favorable terms to qualified borrowers, including 100% financing and competitive interest rates.
Can a USDA Loan Be Used to Purchase a New Home?
Definitely. USDA loans are a fantastic tool for new construction homes in two primary ways:
- Purchasing a brand new, move-in-ready home.
- Financing the entire process of buying land and building a custom home.
Buying a Completed New Construction Home With a USDA Loan
The most straightforward way to use this loan is to purchase a newly built home, like one of our move-in-ready models at Sharp Homes. If the home is located in a USDA-eligible area, and you meet the income and credit requirements, you can purchase it with a standard USDA Guaranteed Loan and enjoy all the benefits of a new build without the wait.
Building a Home with a USDA Construction Loan
For those who want a truly custom experience, the USDA offers a Single-Close Construction-to-Permanent Loan. This incredible product combines the financing for the land purchase, construction, and the final mortgage all into one loan with one single closing.
This means you only have to go through the application and approval process once. The loan funds the construction phase, and once your Sharp Homes custom build is complete, it automatically converts into a standard home loan. It simplifies the process, saves you money on closing costs, and gives you peace of mind.
What Are the Requirements for Building a House with a USDA Loan?
The requirements are divided into two main categories: those for the borrower and those specific to the construction project itself.
USDA Home Loan Requirements
These are the general eligibility criteria for any USDA loan:
- Location: The property must be in a designated USDA-eligible rural or suburban area. You might be surprised to learn that many areas just outside Wichita and in surrounding communities qualify.
- Income: Your household income must not exceed the local limits set by the USDA for your county (e.g., Sedgwick, Butler, Harvey).
- Credit Score: While the USDA doesn’t set a minimum, most lenders look for a credit score of 640 or higher.
- Primary Residence: The home you build must be your primary residence.
USDA Construction Loan Requirements
In addition to the above, a construction loan has a few extra requirements:
- Approved Builder: Your builder must be vetted and approved by the lender. They will need to provide documentation of their experience, licenses, and insurance. Sharp Homes has the experience and credentials to work with lenders on these types of projects.
- Land: You can finance the purchase of your lot with the loan, or if you already own land, you can use its equity toward the project.
- Appraisal: The home will be appraised based on the blueprints and building plans to ensure its value upon completion meets the loan amount.
How Do I Build a Custom Home with a USDA Loan?
Building with a USDA loan is a clear, step-by-step process:
- Check Your Eligibility: First, confirm your income and the potential location of your new home meet USDA guidelines.
- Find a USDA-Approved Lender: Work with a lender who has experience with USDA single-close construction loans. The USDA also has a database of USDA-approved lenders.
- Partner with an Approved Builder: Choose a reputable builder like Sharp Homes who can meet the lender’s requirements.
- Finalize Your Plans: We’ll work with you to design your dream home and establish a firm budget and construction contract.
- Loan Approval: Your lender will process the loan, which includes appraising the plans and approving us as the builder.
- Close & Build: You’ll attend one closing, and then we get to work bringing your vision to life!
USDA Construction Loan Alternatives
If a USDA loan isn’t the right fit, don’t worry! There are other excellent construction loan options available:
- FHA Construction Loan: Requires a low down payment (as little as 3.5%).
- VA Construction Loan: An amazing $0 down option for eligible veterans and active-duty service members.
- Conventional Construction Loan: Typically requires a higher down payment (10-20%) but may offer more flexibility.
Questions? Sharp Homes Can Help With Your Custom Build
Building a custom home is an exciting journey, and navigating the financing can feel complex. At Sharp Homes, we’re here to help. We have experience building beautiful, high-quality homes for families across the Wichita area and can guide you through the process from start to finish. If you have questions or concerns, contact us today. We’re always happy to help shed some light on the home-building process.
