Key Takeaways
- USDA construction loans let eligible buyers purchase land and build a home with no down payment.
- Borrowers must meet USDA rules for income, credit, property location, and approved contractors.
- The loan can simplify the process, but options are limited and rates may be higher than standard mortgages.
If you’re researching how to buy land and build a house with no money down, then a USDA construction loan might be the solution you’re looking for. With this unique loan, you can buy land and build a home with one loan program. Best of all, there’s no down payment required, and you’ll only pay for a single set of underwriting fees and closing costs.
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What is a USDA construction loan?
A USDA construction loan is a one-time-closing mortgage that combines financing for purchasing land and building a new home into a single loan package. The U.S. Department of Agriculture created this loan to help low- to moderate-income borrowers build a primary residence in an eligible rural area without taking out multiple loans or paying numerous sets of closing costs. Lenders approve the project, oversee the contractor, manage construction cost payments, and convert the loan to a standard USDA loan upon completion of the home.
Check your construction loan eligibility. Start hereWhat are the benefits of USDA construction loans?
In addition to being arguably the best loan to buy land and build a house for those who qualify, it also offers the advantages of a standard USDA loan:
- No down payment requirement
- Affordable mortgage insurance
- Below-market USDA interest rates
Can I buy land with a USDA loan?
Yes, you can use a USDA construction loan to buy land as long as you plan to build a primary residence on it and the property is in a USDA-eligible rural area. USDA requires you to begin construction soon after closing, so this loan cannot be used to buy land and wait to build indefinitely. If you want to purchase a lot first, you can take out another loan to buy the land and roll the remaining balance into your USDA construction loan. However, USDA does not allow cash-out, so you cannot reimburse yourself if you purchased the land with cash.
“When you already own the land, your loan-to-value ratio improves, which means you borrow less and often end up with a lower monthly payment.” — Richie Duncan, loan officer with NationWide Home Loans
How does a USDA construction loan work?
USDA construction loans work by combining the land purchase, construction costs, and mortgage into a single loan with a single closing. Instead of taking out separate loans for buying land and building a house, you can finance everything through the USDA Single-Family Housing Guaranteed Loan Program. The USDA also allows you to purchase land and build eligible manufactured homes and some condos.
USDA construction loans can also pay for:
- Buying a lot
- Construction labor and materials
- Administrative and permitting costs
- Contingency reserves
- Inspection fees
- Builder’s risk insurance
- Landscaping and site preparation
- Other USDA-authorized project expenses
USDA construction loan requirements
Before you can qualify for a USDA construction loan, both you and your project must meet specific program rules. Lenders review your finances, the property, and your builder to confirm that everything aligns with the following USDA land loan requirements.
Verify your construction loan eligibility. Start hereBorrower requirements
- Most lenders require a minimum credit score of 640.
- Debt-to-income ratio (DTI) below 41%, with housing costs under 29% of monthly pretax income.
- No bankruptcy in the past two years.
- Income within USDA limits based on area median income (AMI) and family size
- A stable 12-24 month credit history, consistent income, no mortgage forbearance, and timely rent payments.
Property requirements
- Located in an eligible rural area.
- Used as a primary residence.
- Built by a USDA-approved contractor.
- Covered by a new construction warranty.
- Remaining funds after construction are applied to the loan principal.
- Eligible properties include single-family homes, manufactured homes, and some condos.
- Vacation homes, rental properties, and commercial buildings are not allowed.
Contractor requirements
- Be approved by the lender.
- Have at least two years of experience in single-family home construction.
- Hold proper licensing, good credit, and submit to a background check.
- Carry at least $500,000 in liability insurance.
Pros and cons of USDA construction loans
If your goal is to buy land and build a house with no money down, USDA construction loans can be a powerful option. However, unforeseen challenges may affect your options and timeline.
Check your construction loan eligibility. Start herePros:
- You can finance the land, construction, and mortgage with a single-close loan.
- You pay only one set of closing costs instead of multiple loans.
- USDA allows up to 100% financing, so qualified borrowers do not need a down payment.
- You do not start making mortgage payments until construction is complete.
- You can build on land you purchase, inherit, or already own, as long as it meets USDA rules.
Cons:
- USDA construction loans are harder to find because only a small number of lenders offer them.
- Closing times can run longer due to contractor approvals, permits, inspections, and multiple credit reviews.
- USDA charges upfront and annual guarantee fees, which can increase your total loan amount.
- Interest rates are often higher than rates for standard home loans.
- Some borrowers may need to refinance after construction to secure a lower interest rate if market conditions improve.
“At least 220 days after construction is complete and after making six on-time payments, you can opt for a streamline refinance or rate-and-term refinance to lower your interest rate.” — Richie Duncan, loan officer
USDA construction loan lenders
USDA construction loans offer significant advantages, but relatively few lenders originate them because construction financing “requires longer closing times and rate locks, greater investor risk, and the need to coordinate many moving parts over a long period,” according to Duncan. USDA.gov maintains a directory of approved construction-to-permanent loan lenders, which you can use to confirm your eligibility before requesting preapproval.
Current USDA construction loan lenders:
- Union Home Mortgage
- 1st Signature Lending
- American Financial Resource
- Atlantic Bay Mortgage
- Click n’ Close Mortgage
“Choose a lender that knows exactly what this process involves and has closed these loans before. You want someone transparent, upfront, and who doesn’t sugarcoat or gloss over the details.” — Bert Mushlin, loan officer.
USDA construction loan rates
USDA construction loan rates typically run higher than mortgage rates for a lot loan, a stand-alone construction loan, or a standard 30-year mortgage. Lenders price these loans differently based on individual factors, fees, and margins. You may also be able to buy down your rate, which “could be a factor when qualifying at a specific debt-to-income ratio with higher payments,” says Duncan.
What affects USDA construction loan rates:
- Project complexity and construction timeline
- Borrower credit, income, and debt ratios
- Lender fees, margins, and rate-lock length
“Compare every USDA construction loan lender in your area. If options are limited, review rates from other construction loans to gauge whether a USDA loan offers competitive value for their project.” — Richie Duncan, senior loan officer
How to get a USDA construction loan
You’ll follow three main steps to get a USDA construction loan. USDA lenders and approved contractors must both meet program rules before the loan can close.
Check your construction loan eligibility. Start here1. Select a USDA-approved contractor
USDA requires you to choose a contractor who meets strict licensing, experience, and insurance standards. The lender cannot approve the file until the contractor meets USDA requirements.
Contractors must:
- Hold a valid construction or general contractor license.
- Show at least two years of experience building single-family homes.
- Carry at least $500,000 in commercial liability insurance.
- Pass a background check and maintain a satisfactory credit history.
2. Choose an approved lender
You must work with a USDA-participating lender that offers construction-to-permanent loans. Lenders issue pre-approval after reviewing income, credit, employment, and basic project information. At this stage, lenders also request contractor details, plans, and preliminary budgets.
3. Submit your loan application
You’ll submit a loan application once the lender verifies your eligibility and collects the required construction documents. Lenders confirm the property’s rural location, contractor approval, and financial documentation before sending the file through underwriting. The loan process can take 30–60 days to close.
Alternatives to USDA construction loans
Are you exploring how to finance land and build a house, but aren’t sure if a USDA land-to-construction loan is right for you? Consider these alternative loans to buy land or renovate existing properties.
Verify your construction loan eligibility. Start here
FAQs about USDA construction loans
Check your construction loan eligibility. Start hereYes, the USDA offers a combination construction-to-permanent loan, also called a single-close loan. This loan combines financing for the lot, new construction, and a fixed-rate mortgage into a single loan.
Yes, the USDA Rural Housing Site Loan can be used to purchase land on which you’ll construct a single-family home. USDA land loans are only available to low- and moderate-income families. The maximum allowable income is 115% of the borrower’s area median income (AMI).
Richie Duncan with Nationwide Home Loans Group explains that a USDA construction loan offers 100 percent financing with no down payment required, so long as you are well-qualified for credit and meet income and other requirements.
Duncan says it’s neither easier nor more difficult. But owning your land outright can reduce your loan-to-value ratio, which means you won’t need 100 percent financing.
If you have an outstanding lot loan, it must be paid off and rolled into your new USDA construction loan.
A USDA construction loan can only be used to finance single-family homes, manufactured homes, and eligible condominiums. Vacation or second homes, short-term and long-term rental properties, accessory dwelling units, a home you build yourself, commercial buildings, and mixed-use construction do not qualify for USDA financing. In addition, the lot must be in a USDA-eligible rural area.
Most lenders require a minimum FICO credit score of 640 to qualify for a USDA construction loan.
A USDA construction loan typically converts to a 30-year fixed-rate mortgage. At least 220 days after construction has been completed, and after you’ve made six on-time payments, you may be able to lower your interest rate by refinancing via the USDA Streamline Refinance or another refi program.
You can apply for a USDA construction loan through USDA-approved lenders. Search online for available lenders.
Check your USDA construction loan eligibility
Now that you know you can use a USDA construction loan to buy land and build a home, you can explore this option or consider other construction loan programs if a USDA lender isn’t available in your area. Begin the process of finding the homeownership program that fits your goals and budget by clicking the links below.
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