USDA Construction Loan: Rates and Requirements for 2024

By: Erik J. Martin Updated By: Ryan Tronier Reviewed By: Paul Centopani
February 16, 2024 - 14 min read

Buy land and build a home with a USDA construction loan

If you want to own land and build your own home, a USDA construction loan could be ideal.

USDA construction loans can finance the land, build your home, and serve as your long-term mortgage. They essentially roll three loans into one. Plus, there’s no down payment required and only one set of closing costs.

However, these loans can be hard to find. You also need to be eligible and build in a qualified rural area. Read on to learn more about USDA construction loan rules, rates, and other loan types.

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What is a USDA construction loan?

A USDA construction loan is a mortgage that allows borrowers to buy land and build a home with one loan and one monthly payment. This program, which is backed by the U.S. Department of Agriculture, is similar to a standard USDA loan. The big difference is that USDA construction loans combine financing for the land, construction, and a fixed-rate mortgage into a single loan product.

Check your construction loan eligibility. Start here

USDA construction loans offer some serious benefits. Qualified borrowers will enjoy:

  • No down payment requirement
  • Affordable mortgage insurance
  • Below-market USDA rates

However, USDA construction loans are pretty rare. You may be hard-pressed to find a lender offering one. And the USDA has strict requirements for the home buyer and the property being built.

With all these restrictions, some borrowers will find other types of construction loans to be an easier path to homeownership. But for the right person, a USDA construction loan could be ideal. The important thing is to explore all your options and find the right loan product for you.

How does a USDA construction loan work?

USDA construction loans work by offering simplified financing through its Single-Family Housing Guaranteed Loan Program. So rather than obtaining separate loans to buy land and pay for construction costs, borrowers can use this single-close construction loan to pay for everything.

Verify your construction loan eligibility. Start here

According to the USDA, funds can also be used to build and purchase single-family homes, including eligible condos and manufactured homes.

While commonly known as USDA construction loans, they may also be referred to as: One-time close construction loan

  • Single-close loan
  • Combination construction-to-permanent loan
  • All-in-one construction loan

What expenses does a USDA construction loan cover?

USDA construction loans can assist with covering expenses such as:

  • Buying a lot
  • Reasonable construction administrative costs
  • Contingency reserves
  • Inspection fees
  • Builder’s risk insurance
  • Landscaping costs
  • Other authorized items

USDA construction loan requirements

Government-backed mortgage programs often come with numerous requirements that both the property and the borrower must meet. USDA construction loans are no different. In fact, because of the complexity of this land loan, qualifying can be challenging for many potential borrowers.

Verify your construction loan eligibility. Start here

Borrower requirements

To be eligible for a USDA construction loan, you must meet a number of guidelines, including certain credit score and household income requirements.

  • Most lenders require a 640 minimum credit score
  • Your debt-to-income ratio (DTI) should not surpass 41%. This includes keeping your monthly housing expenditure below 29% of your monthly pretax income
  • You must not have experienced bankruptcy in the last two years
  • You cannot exceed USDA income limits based on your area’s median income (AMI) and the size of your family. The USDA Rural Development program is intended to help moderate- and low-income families purchase and build homes

Your lender will also look for 12 to 24 months of clean, unblemished credit history, no gaps in your household income, no mortgage forbearance, and no late or missing rent payments.

“Basically, you want to have the cleanest credit, income, and debt-to-income ratio possible to get this loan,” suggests Brandon Mushlin with

Property requirements

In addition to the borrower requirements for a USDA construction loan, the property you intend to buy must also comply with a number of other guidelines before the USDA will approve your loan application.

  • The property must be located in an eligible rural area
  • The property must be your primary residence
  • You must use a USDA-approved contractor for the construction
  • You must receive a new construction warranty from the builder
  • Any remaining funds after construction ends must be applied directly toward your principal loan balance

In addition, the types of homes eligible to be built are limited to single-family homes, manufactured homes, and eligible condominiums.

“Second or vacation homes, homes intended to be used for short-term or long-term rentals, accessory dwelling units, self-built homes, commercial buildings, and mixed-use construction are not eligible,” adds Richie Duncan, senior loan officer with Nationwide Home Loans Group.

Contractor requirements

For a USDA new construction loan, the project’s contractors must meet certain qualifications. These USDA contractor requirements include:

  • Approval from your lender
  • A minimum of two years’ experience in constructing single-family homes
  • Full licensing for the construction work
  • A solid credit history and a clean background check
  • At least $500,000 in liability insurance coverage

Pros and cons of USDA construction loans

USDA loans are designed to help moderate- and low-income Americans become homeowners. They do this by offering affordable financing for real estate in designated rural areas. Still, it’s important to understand the pros and cons of the USDA construction loan to make the best decision for your financial situation.

Check your construction loan eligibility. Start here

USDA construction loan benefits

The biggest benefit of a USDA construction loan is that you can buy land, build a new home, and finance that finished home over 30 years — all in one single-close construction loan.

“You can either find land to place under contract, use current land you already own, or use land deeded over to you from your family to combine with your chosen and approved builder to construct your home,” explains Mushlin.

  • One loan and one mortgage payment: Simplified financing to build a house and buy land
  • One round of closing costs: You only have to pay for closing costs once since a single closing is involved and only one qualification and one appraisal are required
  • No down payment requirement: Like other loans backed by the U.S. Department of Agriculture, the USDA construction loan offers up to 100% financing. That means qualifying borrowers don’t have to make a down payment
  • Deferred repayment: You aren’t obligated to make monthly payments while the home is being constructed

USDA construction loan disadvantages

The biggest drawback to a USDA construction loan is that they can be difficult to find and are rarely offered by lenders.

  • It's hard to find a lender: Even though USDA backs them, not many lenders offer this type of loan
  • Lengthy closing times: USDA construction loans require patience from everyone involved. “They take longer to close and could involve Realtors, insurance agents, city or county permitting requirements, builder approval, multiple underwrites of your credit file, appraisals, and more,” Duncan notes.
  • Paying guarantee fees: USDA charges both upfront and annual guarantee fees based on your loan amount. The annual fee is broken into 12 installments and included in your regular monthly mortgage payment
  • Higher interest rates: The interest rate you’ll be charged will likely be higher than for a standard home purchase or refinance loans
Verify your construction loan eligibility. Start here

However, you might only be stuck with that higher interest rate for a while.

After your home is built (at least 220 days later) and after making six on-time payments, if market conditions allow, “you can opt for a streamline refinance or rate-and-term refinance to lower your interest rate, if possible,” adds Duncan.

While many requirements and restrictions are involved, “once obtained, this is one of the best loans for a borrower to build their dream home with little to no money paid out-of-pocket,” says Duncan. “As a result, you can save your liquidity, increase your landholdings, and avoid the higher 10 to 25% down payment requirements that other traditional lenders may stipulate with more associated risks.”

USDA construction loan lenders

Although there are big potential benefits to a USDA construction loan, it can be difficult to find lenders offering them.

“Even the largest of lenders don’t offer this program for many reasons. These include factors like a longer closing time, higher risk to underwriting and investors, having to lock the rate longer, and needing to communicate with many moving parts over a long period,” Duncan says.

An online search for “USDA construction loan lenders” should yield some lenders you can investigate.

“I recommend choosing 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 of what you’re looking for,” advises Mushlin.

USDA construction loan rates

As mentioned earlier, USDA construction loan rates will likely be higher than rates offered for a separate lot loan, a construction loan, or a 30-year mortgage loan.

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“Rates are difficult to compare among the lenders, investors, and mortgage brokers offering this loan,” says Duncan.

“Every loan is priced uniquely based on individual factors, fees, and margins. You may also be able to buy down your rate, which could become a factor when trying to qualify at a certain debt ratio with higher payments.”

As always, you should shop with a few different lenders to find the best rate available to you.

If you can’t find multiple USDA construction loan lenders to compare, try expanding your search to include other types of construction loans. By looking at rates for alternative construction loan programs (see below), you can at least get a feel for how competitive a USDA construction loan is and whether it’s really your best option.

How to get a USDA construction loan

To apply for and obtain a USDA construction loan, you must complete the following three steps. This process ensures that both the borrower and the contractor meet the specific requirements set forth by the United States Department of Agriculture.

1. Select a contractor approved by the USDA

You must first come to an agreement with a USDA-approved contractor who must meet the following requirements:

  • They must possess either a construction or contractor’s license
  • They need at least 2 years of experience in constructing single-family residences
  • They require no less than $500,000 in commercial liability coverage
  • They must undergo and clear a background check
  • A satisfactory credit history is essential

2. Choose an approved USDA construction loan lender

With your contractor agreement in hand, it’s time to start looking for lenders to get pre-approval for a loan. Remember that you need a lender who is a member of the USDA loan program and specializes in USDA construction loans.

Prepare to disclose details such as your income, proof of employment, an overview of your assets and debts, your DTI, and undergo a credit evaluation to obtain the initial mortgage approval.

3. Submit your loan application

After you’ve gathered all the necessary information, you’re ready to send off your USDA loan application.

Before submitting your application, confirm your contractor and the location of your property, as these details are required for qualification. Depending on your specific circumstances, the loan process can take up to 60 days to complete.

Can you buy land with a USDA construction loan?

A USDA construction loan allows you to purchase both the land and the home. But some restrictions apply. For example, the land must be in a USDA-approved location. These areas must be “rural in character,” though many small towns and suburbs qualify.

“Also, this is not a loan that you can use to purchase land now and build on it at a later time. Once you close on the loan, you are expected to start building when given the green light, which is usually quickly,” says Richie Duncan with Nationwide Home Loans Group.

Check your construction loan eligibility. Start here

If you want to purchase land first while you are shopping for builders, this is allowed. You can take out a loan elsewhere to buy the land, and then a USDA construction loan lender can include the payoff of that land balance in your new loan.

“If you pay cash or already own the land free and clear, you cannot get cash back or be paid back. That would involve a cash-out loan, which is not allowed in any version of a USDA loan,” cautions Mushlin with

Note that it’s not necessarily easier to get a USDA construction loan if you already own the land. Although it might be easier to get another type of new construction loan.

“Having your land paid off or owned outright will reduce your loan-to-value ratio (LTV), which means you won’t need 100% financing,” Duncan continues. “This increases your possible equity position and will lower your payment further than a borrower purchasing new land or paying full price for the land.”

Alternatives to USDA construction loans

Here are a few other home construction and renovation loans options to consider if you’re having trouble finding USDA loans or want to widen your search.

Verify your construction loan eligibility. Start here

VA one-time close construction loan

VA one-time-close construction loans are a unique type of mortgage designed to benefit veterans and active-duty military members. The Department of Veterans Affairs, a federal organization in charge of assisting the military community, is responsible for guaranteeing these loans.

Unlike conventional loans, VA one-time close construction loans can provide up to 100% financing. This means that qualified borrowers do not have to make a down payment, which can make homeownership more accessible. They share similarities with USDA loans and are tailored to those who have served in the military, acknowledging their contribution to the nation.

FHA one-time close construction loan

The Federal Housing Administration (FHA) backs the FHA one-time close construction loan. It’s an option that particularly appeals to first-time home buyers.

With the possibility of putting down as little as 3.5%, it offers an accessible route to homeownership for those who might not have a significant amount of savings. Additionally, FHA loans are known for their lenient credit guidelines, making them more accessible to a broader range of buyers, including those with less-than-perfect credit scores.

Conventional one-time close construction loan

Conventional one-time close construction loans are secured by government-sponsored enterprises, such as Fannie Mae and Freddie Mac. These loans differ from government-backed options in that they typically require higher qualifications.

Applicants must usually have a credit score of 620 or higher and be prepared to put at least 5% down. These requirements make conventional loans a viable option for borrowers with stronger financial standing, reflecting the lower risk to the lender.

FHA 203k loan

The FHA 203k loan is a specialized program within the Federal Housing Administration’s offerings. It’s designed to support buyers looking to purchase and renovate a fixer-upper home.

What sets this loan apart is its ability to finance both the purchase price of the home and the cost of necessary renovations. This dual-purpose function can make it easier for buyers to transform a property in need of TLC into their dream home. With requirements of only 3.5% down and a minimum 580 credit score, it opens up opportunities for a wide array of potential homeowners.

USDA loan

The traditional USDA home loan is designed to support rural home buyers. Unlike the one-time close construction loans mentioned earlier, obtaining a USDA rural development loan often involves getting a separate lot loan and/or construction loan.

The right type of construction loan depends on your location, home building budget, credit score, and down payment, among other factors. You should ensure you’ve explored all your options and found the best loan before signing on.

FAQ: USDA construction loan

Check your construction loan eligibility. Start here

Does USDA do construction loans?

Yes. 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.

Is there a USDA land 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).

Can you get 100 percent financing on a construction loan?

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.

Is it easier to get a construction loan if you already own the land?

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.

Can you build a house on land you are still paying for?

If you have an outstanding lot loan, that loan will need to be paid off and rolled into your new USDA construction loan.

What disqualifies a home from USDA financing?

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.

What credit score do you need for a USDA construction loan?

Most lenders require a minimum FICO credit score of 640 to qualify for a USDA construction loan.

How long does a construction loan last?

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.

How do I apply for a USDA construction loan?

You can apply for a USDA construction loan with USDA-approved lenders who offer this loan program. Search online for available lenders.

Check your USDA construction loan options

A USDA construction loan can be an attractive and affordable option for buying land and building a home.

But these hard-to-find loans aren’t available to everyone. Luckily, there are plenty of other construction loan programs on the market.

Explore the different types of construction loans available, then talk to lenders about which program can best meet your needs.

Time to make a move? Let us find the right mortgage for you

Erik J. Martin
Authored By: Erik J. Martin
The Mortgage Reports contributor
Erik J. Martin has written on real estate, business, tech and other topics for Reader's Digest, AARP The Magazine, and The Chicago Tribune.
Ryan Tronier
Updated By: Ryan Tronier
The Mortgage Reports Editor
Ryan Tronier is a personal finance writer and editor. His work has been published on NBC, ABC, USATODAY, Yahoo Finance, MSN Money, and more. Ryan is the former managing editor of the finance website Sapling, as well as the former personal finance editor at Slickdeals.
Paul Centopani
Reviewed By: Paul Centopani
The Mortgage Reports Editor
Paul Centopani is a writer and editor who started covering the lending and housing markets in 2018. Previous to joining The Mortgage Reports, he was a reporter for National Mortgage News. Paul grew up in Connecticut, graduated from Binghamton University and now lives in Chicago after a decade in New York and the D.C. area.