USDA loans are for low income families that can’t secure financing with any other program. They offer the ability for these families to purchase a safe and sanitary home. Contrary to popular belief, though, it’s not only for existing homes. You can buy a lot and build a home with the USDA construction to permanent loan.
Purchasing a Lot and Building a Home
There are many restrictions you must follow with the USDA construction to permanent loan. In terms of the lot, it must be average for the area. This goes along with the standard USDA requirements for an existing home. The program was not designed for borrowers to buy elaborate homes. Instead, it is for modest homes in a rural area. The same goes for the lot you purchase. You can’t purchase an exceptional amount of land and expect to USDA funding.
As far as building the home, the loan funds can cover the costs of construction. The costs must be within reason for the area, though. The fees you may include are not just for building the home. They are also for administrative and architectural fees that coincide with the land as well.
Your lender will have direct say in which contractors you can use. They are under due diligence by the USDA to monitor all professionals working on the home. The lender must determine that the builder has:
- 2 or more years’ experience building custom homes
- Proper licensing
- Proper insurance
- No pending litigation or liens against them
- No criminal history
Processing the Loan
The USDA construction to permanent loan is a two-part loan. It has one closing, but works like a temporary to permanent loan. The temporary part of the loan occurs during construction. This is when the lender holds onto the funds in escrow. As the builders do the work, the lender will pay them. The disbursements, called draws, are conducted during specific periods. The lender can’t disburse the funds without your signature, though. It’s the lender’s job to inspect the work and your job to approve the disbursement.
You don’t owe any payments on the loan until funds start disbursing. Once this happens, you owe interest only payments on the money disbursed. Initially, this will likely mean small payments. As the house gets closer to completion, the payments get bigger. They are always just interest payments, though.
Once the home is complete and livable, your loan turns into a permanent loan. This is when it is amortized over the term with principal and interest payments. You no longer make just interest payments.
Taking Care of Extra Funds
Sometimes the estimated funds needed are overstated. If you have more funds leftover than were needed for construction, your lender must apply them to the principal of your loan. You can’t receive any cash in your hands at the completion of construction. The only funds you may receive are those that reimburse you for any prepaid expenses that you paid out of your own pocket. Paying down the principal helps you pay your loan off faster!
Paying Annual Fees
The annual fee on USDA loans also pertains to construction loans. This fee begins immediately following the closing. The lender can pay the fee for you with monies escrowed for that purpose. Nothing happens when the loan transfers to a permanent loan. You continue to pay the same amount of the annual fee. Right now, this means 0.35% of the loan amount. You calculate what you owe based on the outstanding principal balance of the loan.
Qualifying for the USDA Loan for a Lot and to Build a Home
Qualifying for the USDA loan for your lot and to build your home works the same as an existing home. The guidelines are flexible.
- The lot and home must be located in a rural area
- Your household income can’t exceed 115% of the average for the area
- Your credit score should be at least 620 or higher
- Your credit history should be ‘decent’
- Your debt/income ratio shouldn’t exceed 29/41
These are the basic guidelines. If you have a credit score higher than 620, you may have a more streamlined approval process. If, however, your score is lower than 620, you may have to undergo a bit more scrutiny. This allows the USDA to make sure you are a reputable borrower.
Generally, the lender has the say in whether you are approved for USDA financing. However, the USDA does require a full package be sent to them prior to closing. This gives the USDA a final look over the loan the lender is about to fund. The USDA guarantees 90% of the money the lender gives you, so they must make sure you are a good risk.
The USDA loan is a great way to buy a lot and build a home. It may take a little extra time, but it is worth the effort. With 100% financing and flexible guidelines, you can build the house you always wanted with a great loan.