Please Note: Neighbors Bank does not currently offer USDA construction loans, however, we do offer FHA Construction-to-Permanent loans, which combine construction and mortgage financing into a single, simplified loan. These loans can be a great option for buyers who meet FHA requirements and are building a new home or significantly renovating an existing one.
What is a USDA construction loan?
USDA construction loans are a type of one-time close mortgage guaranteed by the U.S. Department of Agriculture (USDA). They're part of the USDA's Single Family Housing Guaranteed Loan program, which helps approved lenders make homeownership more accessible for rural, low- or moderate-income homebuyers.
Because the USDA guarantees them, these loans offer generous terms, including no down payment requirement and competitive interest rates. The challenge is that very few USDA construction loan lenders are currently on the market. According to HMDA data, only about 1,000 to 1,500 of these loans are closed each year across the entire U.S., compared to more than 100,000 standard USDA purchase loans.
Because they’re so rare, getting approved often requires careful planning and finding a lender experienced with the program.
How Do Single-Close USDA Construction Loans Work?
One of the greatest benefits of a USDA construction-to-permanent loan is that it's a single-close mortgage. With many new-home construction projects, you'll have to go through the lending process twice: once for the construction loan and once to refinance that into a standard mortgage to purchase the final property.
With a USDA construction loan, you only need to apply for one loan and go through the entire process once. You'll pay only one set of closing costs, and when it's all said and done, you'll walk away with a USDA-backed 30-year mortgage on your new home. Along the way, you can use the loan to cover various construction-related expenses, from the initial land purchase to permitting, design, and landscaping fees.
The downside of USDA loans is that they're more restrictive than conventional mortgages. Consequently, many buyers don't fit the strict income limits and location requirements needed to qualify for a USDA new construction loan, and it may also be difficult to find a lender that offers this loan.
Note: USDA construction loans are not offered through the USDA Single Family Housing Direct Loan Program. They are only available through the Guaranteed Loan Program and must be originated by an approved lender.
USDA Construction Loan Requirements
Requirements for USDA construction loans are similar to those for other USDA loan types. Your total household income cannot exceed the USDA income limits for your local area. These generally start at $119,850 for a household of up to four, but they may be higher based on an area's cost of living.
Although the USDA doesn't have its own minimum credit score requirement, most lenders look for a score of at least 620. Neighbors Bank typically requires a score of 620, but you may be able to qualify with strong compensating factors. You'll also typically need a debt-to-income ratio at or below 41%. For manual applications, housing costs, including property taxes, insurance, and homeowner's association fees, usually can’t be more than 34% of your income, even with a waiver.
Property Requirements for USDA Loans
USDA loans also include more property restrictions than conventional loans. Because USDA building loans are aimed at helping homebuyers in rural areas, your construction project will have to fall within one of the USDA's designated rural areas. Additionally, the home must be your primary residence.
While the home must be located in one of the USDA’s designated rural areas and serve as your primary residence, there is no cap on square footage. Instead, the USDA requires that the home be considered “modest,” meaning it must be something a low- to moderate-income borrower can reasonably afford based on their repayment ability, and it cannot be primarily designed for income-producing purposes.
Contractor Requirements for USDA Loans
A USDA new construction loan also has specific requirements for the contractors involved in the project.
To qualify, your contractor must:
Be approved by your USDA lender
Have 2+ years of single-family home construction experience
Be properly licensed and insured (minimum $500K liability coverage)
How to Get a USDA Construction Loan
Most importantly, before you get too far in the process, you'll need to locate a USDA-approved contractor and a lender to finance a USDA construction loan.
Once you've found both of those, you'll follow a similar process to what you would if you were applying for a standard USDA loan:
Get preapproved with your lender
Find land in a USDA-approved area
Sign a purchase agreement
Go through underwriting and get final approval
Sign and close on the loan
Begin construction on your new home
If you meet the basic USDA construction loan requirements, qualifying for these single-close mortgages isn’t the hard part. Finding a lender and an approved contractor are the most challenging boxes to check, but you're well on your way once you've done that.
Emily Kittle is an experienced underwriter with a strong background in risk assessment, training, and loan decision-making. She excels at solving complex mortgage challenges and guiding loans to closing using creativity and critical thinking.
