F & M Bank : USDA Construction Loan Information for Homeowners and Builders

USDA Construction Loan Information for Homeowners and Builders February 28, 2023/in Bank Products and Services

Have you always had your heart set on buying land and building your own home in the rolling countryside of Shenandoah Valley? Do you have an existing property that you would like to finally build your dream house on? Or maybe you're having trouble finding the right home at the right price in today's volatile housing market and thinking about just building one yourself. If any of these questions apply to you, you're not alone. In fact, the Virginia housing construction market is booming, with almost 40,000 permits issued last year, up 27% from the previous. But building your own home can be a daunting task, and one of the most crucial early steps to planning and constructing your own home is securing the funds to pay for it-especially as construction loans can be more difficult to qualify for than conventional mortgages used to buy a home.

Fortunately, there are many loan programs available to Virginia residents looking to build their own homes. A popular local choice is the USDA Single-Close Construction-to-Permanent Loan (also known simply as a USDA Construction Loan). This loan, offered by the U.S. Department of Agriculture, is available through select local financial institutions, including F&M Bank. Guaranteed by the federal government, these loans provide affordable financing opportunities to low- and moderate-income families looking to build their dream homes in the rural regions that they love.

USDA Construction Loans can be the perfect answer for some borrowers, but they do have specific requirements and regulations that may be intimidating. In this post we'll break down their basic eligibility rules, discuss the benefits of USDA loans over other construction loans, and help you determine if a USDA Construction Loan is right for you.

Am I eligible for a USDA Construction Loan?

Like conventional home loans, USDA loans have certain financial conditions that must be met in order for borrowers to qualify. However, USDA loans-including USDA Single-Close Construction-to-Permanent Loans-also have additional requirements that borrowers, builders, and the property itself must meet, including restrictions on the property's location, and income limits for the borrower.

Here are the basic qualifications for each:

Property Requirements

The home you are building must be used as your primary residence and be a single family home. The land you build on needs to be located in a designated rural area (one with a population below 35,000). Eligible nearby areas in the Shenandoah Valley include Bridgewater, Broadway, Edinburg, Elkton, Stuart Drafts, and Timberville. To see if a property you are interested in qualifies, use the USDA Eligibility Map.

Borrower Requirements

Typically, you'll need a credit score of at least 640 and a debt-to-income (DTI) ratio of no more than 41%. However, there can be some flexibility on these requirements, as long as the payment doesn't exceed 29% of your pre-tax income and other qualifications are met or exceeded. In addition to minimum income requirements, this program also has a cap on income. For instance, in Augusta County, Rockingham County, and Shenandoah County, that cap is $103,500 for a family of four.

Builder Requirements

To ensure that you are getting a quality residence-and the lender and USDA aren't funding a project that won't make its way to completion-you can only work with a vetted contractor to build your home. Contractors must be licensed, which you can verify through the Virginia Department of Professional and Occupational Regulation License Lookup. They also must pass a background check, have good credit history, and at least 2 years of experience building single-family homes. Lastly, they need at least $500,000 in commercial liability insurance.

How do USDA Construction Loans differ from traditional construction financing?

Firstly, it's important to note that there are two kinds of loans people use to build a home: a construction loan, which is later paid off with a new mortgage when the home is finished, and a construction-to-permanent loan, which automatically converts to a mortgage after construction. A basic construction loan has its own qualification standards, own closing costs and down payment requirements (usually 20-30%), and will eventually require a second closing when it's time to get a regular mortgage. In other words, it can be more work and cost more upfront because you will pay two sets of closing costs, need to apply for two separate loan products, and may need to have two separate down payments, depending on the lender(s).

A single-close construction loan, also called a construction-to-permanent loan, is often preferred because it streamlines the lending process. You'll have just one application and closing, and won't need to worry about getting a second approval for a loan once your home is complete. USDA Construction Loans are single-close loans. In addition to a simplified loan application process, there are other benefits to USDA Construction Loans.

Benefits of USDA Construction Loans

A USDA loan can be a lifeline for individuals looking to buy or build a home in rural areas who may not qualify for other, conventional home loans. Here are just a few of perks of using a USDA Construction Loan to finance your build:

• No down payment or PMI required. USDA loans can finance 100% of your land purchase and build. And even though you don't need to put any money down, you also won't need to pay for private mortgage insurance (PMI) each month. Keep in mind that there will be other closing costs, and there is an annual fee associated with USDA home loans, currently set at .35% of your mortgage balance.
• No payments required until the house is complete. Building a home while footing the bill for your current residence can be challenging. With USDA Construction Loans, you won't be required to make payments until you are able to move into your new home.
• More flexible income and credit requirements. While borrowers do need to meet certain conditions (as listed above), they tend to have greater flexibility than those of conventional home loans. Additionally, (non-USDA) construction loans often have even stricter requirements. If you find that you aren't qualifying for a regular construction loan, a USDA Construction Loan might be the answer.
• Covers all your costs. These loans are designed to cover everything associated with building a home including buying the land, preparing the site, securing permits, designing plans, setting up infrastructure from driveways to septic systems, labor and material costs, landscaping costs, insurance, and administrative and inspection fees.
• No second loan needed. As with all single-close loans, you don't need to worry about securing a mortgage once construction is completed.

Drawbacks of Using a USDA Loan

While there are lots of reasons why borrowers might choose a USDA loan, keep in mind that there can be some cons to financing your build with their loan products-many of which stem from the fact that these loans are highly-regulated. Here are a few of the potential downsides or complications you might encounter when using a USDA Construction Loan:

• Restrictions on location. You can't build your home anywhere-it must be in a designated rural area.
• Income caps and requirements are limiting. This program is only available for low- and moderate-income families and individuals. However, in order to qualify for a loan, the payments must also not exceed a certain percentage of your income. This means there are built-in limitations to the size and style of home you can build, based on your income.
• Must work with an approved contractor. Finding a contractor who meets USDA requirements can sometimes be difficult and some contractors are hesitant to do so because of additional requirements.

How do I apply for a USDA Construction Loan?

Applying for a USDA Construction Loan requires many of the same steps as applying for a conventional mortgage. However, there are some additional things you'll need to address to help your application get approved. Working with a qualified lender can help ensure that you meet all the requirements. Here are a few things you'll need to do to apply:

1. Find a bank that offers USDA Home Loans. These loans are backed by the government, but granted through local banks, and not financial institutions offer them.
2. Select the right contractor. Your lender will be approving your contractor based on the builder requirements listed above, so you need to be sure your selected contractor can meet them. If you're not sure, discuss the requirements with several contractors, or reach out to your loan officer-they may even be able to point you in the right direction. For more information on selecting a builder, check out our Virginia Homebuyer's Guide to New Construction.
3. Find an eligible property. Use the USDA Property Eligibility Map to ensure that your property is in an eligible rural area.
4. Gather your financial documents. You'll need to provide proof of all income in the form of pay stubs and income tax returns. You'll also need all information associated with your debts, from credit card statements to car loans. Lastly, you need documentation of all your assets: bank and investment account statements, vehicles/boats, real estate, and other items of significant value.

Once you have completed the above steps, you are ready to work with your lender to submit your application and the approval process can begin. There are a lot of moving parts involved in approving and underwriting a USDA Construction Loan, so expect 30-60 days from the time you submit the application until final approval.

Apply for a USDA Home Loan with F&M Bank

At F&M Bank, we're proud to serve the rural residents of Shenandoah Valley, from Elkton, Bridgewater, Broadway, and Timberville in Rockingham County, to Edinburg and Stuart Drafts in Shenandoah and Augusta. We know that finding the right construction financing to build your country retreat can be one of the more complicated aspects of an already complex undertaking and will work hard to match you with the right loan to meet your needs.

USDA Rural Development Loans have helped tens of thousands of rural American families achieve their homeownership goals, and a USDA Construction Loan might be the answer to your lending needs, too. Apply for a USDA loan online on our Mortgage page today or stop by your local branch to speak to a lender and learn more about how USDA Construction Loans can help make your dreams of homeownership come true.

Share this entry

• Share on Facebook
• Share on Twitter
• Share on WhatsApp
• Share on Pinterest
• Share on LinkedIn
• Share on Tumblr
• Share on Vk
• Share on Reddit
• Share by Mail