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What Is A USDA Construction Loan?

Reviewed by: David Naimey

Approved by: Chad Turner

While a regular USDA loan lets you buy a house that’s already built, a USDA construction loan lets you build a new one instead. USDA considers a property new construction if the dwelling has been built within 12 months and has never been occupied

What Are The USDA Construction Loan Requirements?

Evidence Of Certified Plans And Specifications

The first major requirement is that the lender is required to obtain evidence that a new construction property was built in compliance with certified plans and specifications (e.g., International Residential Code, CABO, BOCA, etc.). This can be done in the following ways.

By providing a copy of an eligible building permit that has been issued by an approved jurisdiction. The State Director is responsible for making the determination of an “eligible jurisdiction” per RD Instruction 1924-A.


By providing a Certificate of Occupancy or completion certificate issued by an approved local jurisdiction as determined by the State Director and published as a state supplement; or Certification from a qualified individual or organization (e.g., licensed architect, engineer, national code certified plan reviewer, local building official, etc.) that has reviewed the plans and specifications, and determined they meet all applicable building codes and development standards. If the reviewer does not have their own certification form, Form RD 1924-25 “Plan Certification,” may be used.

Construction Inspection Requirements and Procedures

The second major requirement is that the lender must also retain evidence that construction inspections were performed throughout the project in accordance with section 1980.341(b)(2). This can be done in the following ways:


Certificate of Occupancy issued by an eligible local jurisdiction as determined by the State Director and published after a minimum of 3 construction inspections were performed AND a 1-year builder warranty plan issued acceptable to RD.


Copies of 3 construction inspections performed when footings and foundation were ready to be poured, the shell is complete, but plumbing, electrical, and mechanical work is still exposed. When the final inspection of completed work before occupancy and a 1-year builder warranty plan issued acceptable to RD (builders may utilize their form, HUD-92544, or Form RD 1924-19).


Final inspection and a 10-year insured builder warranty plan are acceptable. (Applicants who wish to build their own homes cannot self-warranty their work.)


New construction documents are only normally needed after USDA loans (unless there is a special circumstance). Most of the time the builders will not execute the warranty until closing, so you will just need to have the actual warranty for the underwriter to review and request that it be executed at closing. An appraisal inspection IS required prior to the USDA mortgage. You can choose to wait until the property is complete OR you can have the initial inspection done prior to the completion of the property and then pay to have a completion report done at the end. This will cost a few extra dollars (typically between $125-$200), but could save you time! 


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