What Is A VA Construction Loan And How Can I Get One?
Did you know that the privilege of being a service member extends to the types of home loans you can get? You may already know you can get a VA loan for home purchases, but did you know you can also get a VA construction loan? If you want to build a home, this type of loan can help you achieve that goal.
We'll cover how a VA construction loan works, how to get one and the pros and cons of this type of loan, a valuable benefit that rewards military service.
What Is A VA Construction Loan?
The Department of Veterans Affairs (VA) offers valuable benefits to its active-duty and veteran service members and eligible spouses through the VA home loan program. These include VA construction loans. VA construction loans are short-term loans that go toward helping you build a home.
The VA doesn't offer construction loans outright. Instead, it provides government insurance, so VA-approved private lenders can offer loans to qualified borrowers.
The VA construction loan is just one of the mortgage loans available through the VA.
How Does A VA Construction Loan Work?
You can use a VA construction loan to buy, build and pay off a home. You can do this with one, two or as many as three loans – if you need to finance a land purchase. A VA construction loan disburses money in installments as you build your home. Each installment is called a draw and goes toward paying for each part of the home build one at a time.
As part of the process, a VA home appraiser will look at the property to determine the fair market value. This helps the lender make sure that the amount they lend isn’t over the home’s value.
The closing process will take 45 to 60 days to complete, and you'll receive money in an escrow account, disbursed based on project benchmarks as needed.
The home will need to undergo a final VA inspection upon completion, but first, let’s review the types of loans you may need to construct the home.
Land loans are available, but there are restrictions on the types of land parcels that qualify. The VA only offers land loans in conjunction with home construction loans, and borrowers must plan to begin construction as soon as possible. In other words, you cannot use a VA loan to buy land without immediate plans to start building.
Some VA-eligible borrowers may already own their land or may decide to buy land without a VA loan because of the time it takes to apply and receive the money.
When it comes to VA construction loans, there are two types:
One-Time Close Loans
A one-time close loan simultaneously takes care of the construction loan and permanent financing. The lender establishes the financing before construction, and the terms become permanent at the end of the building process.
Ultimately, you'll have a traditional mortgage that you pay off monthly. The convenience is attractive, but getting all the pieces to fall into place promptly can be challenging.
Two-Time Close Loans
As the name suggests, this option has two separate loans and, thus, two closing dates. The first loan is short-term and finances the costs of construction and closes before building begins. Once the home is complete, you’ll transition the loan into a permanent VA loan, typically through a refinance.
If the home and the property can ultimately pass appraisal standards, this route might be quicker and easier.
How To Get A VA Construction Loan
We’ll detail the process of how to get a VA construction loan.
1. Make Sure You Qualify: Eligibility And Your Entitlement
First, you must qualify for the loan by getting a Certificate of Eligibility (COE). The COE outlines your eligibility based on your minimum service requirements, which depend on your branch, service time and status. Disabled veterans may be eligible for other housing grants, financial waivers and tax benefits.
2. Buy The Land
Next, you can buy the land on which you plan to build your house. Keep in mind the land must meet certain local and nationwide VA requirements. These may include:
- Year-round access to the home
- Free of natural hazards, including flood zones, sink holes and environmental contamination
- Safe and potable water access and safe sewage disposal
- Proper drainage
3. Find A VA-Approved Construction Loan Lender
Next, get preapproved for a loan through a lender that offers VA construction loans. Not all lenders that offer VA loans offer VA construction loans. You may find this to be the most difficult part of the process because you may find it challenging to access a lender that offers both. Note that Rocket Mortgage® doesn't offer construction loans.
Contact a regional VA center to learn about the services provided in your state.
4. Get Your Initial Home Loan Approval
In addition to meeting specific requirements for eligibility, your building plans must also undergo an approval process.
The risk of a home loan to purchase an existing home is compounded by the risks inherent with home construction. Stricter requirements may be imposed on home builders.
Individual Credit Requirements
The VA itself doesn't set credit requirements for VA loans. Private lenders who issue the loans set their requirements. Lenders will consider your:
- Credit score: This is a three-digit number that summarizes how you've handled your debt. The minimum credit score that lenders will consider is typically around 580 for a VA loan, but you may need to qualify with a higher credit score depending on your situation.
- Debt-to-income ratio (DTI): DTI refers to all your monthly debt payments divided by your gross monthly income. The minimum DTI requirement may be around 41%, but check with your lender about your criteria.
- Residual income: VA residual income refers to discretionary income leftover after you pay all major expenses. In other words, it helps your lender decide whether you have money left over after taking care of daily expenses. A VA residual income limit depends on where you purchase your property, your regional location and the number of people in your household. Residual income is critical because it helps lenders see how well you can afford your mortgage payment.
Your lender will use this information for preapproval, which means they’ll look at such financial documents as pay stubs and bank statements, COE, tax returns and investment account information. You'll also undergo a hard credit check. Preapproval helps you understand how much of a loan you may qualify for.
Building Plans And Property Review
Initial approval involves submitting construction plans for initial appraisal, which may include descriptions of the layouts and planned materials for the home.
Again, the land and the new construction must meet property requirements, applied across all VA home loans.
5. Find A Registered Contractor
Next, you'll have to find a VA-registered contractor willing to work under the VA oversight and payment terms. The builder must have a valid builder identification number for the proposed construction.
Explore the VA loan information hub to find registered builders and answers to other VA loan questions you may have. Note that you cannot perform the work yourself. If you move forward with a private loan and complete the work yourself, the VA may authorize a traditional mortgage to pay off the construction loan if the home meets its appraisal standards.
Pros And Cons Of VA Construction Loans
Look at the pros and cons of building a house funded by VA loans before deciding if it’s the right option for you.
Loan benefits include a low down payment, lenient credit requirements, low interest rates, closing costs that roll into the loan and a one-time upfront funding fee.
Low Down Payment
You can get a VA construction loan with no down payment required, though it may depend on your lender, credit score and financial situation. You will be required to pay a funding fee.
Lenient Credit Requirements
VA loans are generally easier to get approved, with a lower credit score requirement compared to other construction loans as well as a higher allowable debt level. Note that lenders are free to set their own requirements for a VA construction loan.
Low Interest Rates
You can typically get a VA loan for a lower interest rate compared to a conventional loan. However, your lender will take your entire profile into consideration, including your credit score, DTI and residual income.
Closing Costs Can Be Rolled Into The Loan
You may be able to roll some VA closing costs into your loan. Closing costs are fees you must pay to your lender in exchange for purchasing your loan. On average, closing costs typically run 3% – 6% of the purchase price. Your specific closing costs depend on your loan type and location. When you roll your closing costs into your loan, you push your closing costs into the mortgage, which creates a larger loan amount. That means you may pay more total interest over the course of the loan and have higher monthly loan payments.
One-Time Upfront Funding Fee
One of the requirements of a VA loan is the upfront funding fee, a typical fee requirement that borrowers may need to pay to help financially support and sustain the home loan program. Some individuals may not have to pay a VA funding fee, particularly if they have a disability.
If you have a single-close loan, you must pay the funding fee within 15 days of closing. For a two-time close loan, must pay the funding fee within 15 days of the permanent closing.
It’s important to also consider the cons before you choose this type of construction loan.
The lack of VA construction loan lenders could make the process more difficult. Finding a lender offering a VA construction loan and VA purchase loan may require a longer timeline.
Construction Loan Risks
A few risks are inherent in construction loans, including following all requirements and area regulations, choosing the right contractor that meets VA qualifications and having the right qualifications for preapproval. The construction draw process also presents challenges because every stage of the construction project must be considered. Progress monitoring might also present challenges, as might a home appraisal.
Finally, once the home is built, a VA inspection will occur, which could also present challenges.
Delays can occur when dealing with federal bureaucracy. You may plan to encounter extra paperwork during the loan approval process, particularly with a VA construction project.
Enhanced Oversight Of The Process
The VA retains oversight of the project during the construction phase, which can cause issues between the homeowner, the contractor and the VA's representative.
VA Construction Loan FAQs
If you still have questions about VA construction loans, look at our construction loan FAQs.
Can I buy land with a VA loan?
You can only buy land with a VA loan when it is done at the same time as new-home construction. You cannot purchase land with a VA loan if you don’t plan to build on it immediately.
Can I buy a farm with a VA loan?
You can use a VA loan to purchase a farm only if a residence is on the land and you live in the property as your primary residence. The loan may not be used to purchase a business, so some farms may not be eligible.
Is there an owner-occupancy requirement?
The VA has owner-occupancy requirements, including that you can’t use the property as a second home, vacation home or investment property. You must also move into your home within a reasonable amount of time – 60 days after closing (though this may change depending on military assignments).
The Bottom Line: VA Construction Loans Are Possible, But Rarely Made
You may find it difficult to complete new home construction solely with a VA construction loan due to restrictions and possibly limited access to these types of loan. However, it's still important to recognize the VA construction loans as one of your options as a qualifying military member, veteran or eligible surviving spouse.
Ready to apply for a traditional VA home loan? Apply online now.