Buying or building a home is likely one of the largest purchases you’ll make in your lifetime. If you served in the military a VA loan can help make owning your own home more affordable. VA loans require no down payment and have competitive interest rates. But did you know you can also use a VA loan to build a brand new home?
In this comprehensive guide, we’ll explain everything you need to know about using a VA loan to build a house from the ground up.
What is a VA Construction Loan?
A VA construction loan is a mortgage that allows eligible veterans and service members to finance the construction of a new home. It covers the cost of purchasing the land as well as building the home itself.
Unlike a traditional mortgage a VA construction loan provides funds in phases over the course of the building process. You don’t receive one lump sum upfront to cover the full cost.
Key Benefits
There are a few key advantages to VA construction loans:
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No Down Payment Required: Just like with a regular VA loan, eligible borrowers can get a VA construction loan with 0% down. You don’t need any money upfront.
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Potentially Lower Rates: VA loans in general offer very competitive interest rates. Rates on VA construction loans may be a bit higher than rates on existing homes, but still tend to beat rates for conventional construction loans.
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No PMI: VA loans don’t require private mortgage insurance even with low or no down payment. This can save you hundreds per month.
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Flexible Underwriting: VA loans have more flexible credit and debt-to-income requirements than conventional loans. This helps more veterans qualify.
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Veteran-Friendly: The VA works directly with lenders to help veterans get approved and understand the process. Their team is dedicated to helping veterans use their benefits.
VA Construction Loan Eligibility
To qualify for a VA construction loan, you must first meet the basic VA loan eligibility criteria:
- Serve a minimum of 90 days on active duty
- Receive an honorable or general under honorable conditions discharge
- Have a valid Certificate of Eligibility (COE)
In addition to the standard VA loan requirements, you’ll also need:
- A builder enrolled in the VA builder registry
- Complete set of construction plans and specifications
- Approval from VA appraiser on build plans
Spouses of deceased veterans may also be eligible in certain cases.
The VA Construction Loan Process
Building a home with a VA construction loan follows a different process than purchasing an existing home. Here are the key steps:
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Get Pre-Approved
Just like with a regular VA loan, you’ll want to get pre-approved first. This helps you set a budget and shows sellers/builders you’re a serious buyer.
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Find Land and Builder
Research land listings in the area you want to build. Once you find a lot, begin interviewing potential builders and request bids. Make sure the builder is VA-approved.
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Submit Plans for Review
Work with your builder to finalize the new construction plans. Your lender will submit the plans to the VA for review and approval.
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Appraisal and Loan Approval
The VA will assign an appraiser to evaluate the construction plans and specifications. They will determine an estimated value for the completed home. If the appraisal is approved, the lender can move forward with approving the loan.
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Loan Closing
Once approved, you’ll close on the construction loan. Closing costs with VA loans tend to be lower than other loan types. At closing, you’ll sign the deed and take ownership of the land.
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Construction Begins
Now the building can begin! The lender will dispense loan funds in phases based on the progress of construction. VA appraiser will inspect home at various stages.
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Final Inspections
When construction is complete, the home must pass final VA inspections. Any issues found must be corrected.
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Convert to Permanent Loan
With construction complete, the construction loan is either paid off or converted to a permanent VA mortgage. This is essentially like refinancing into a standard 30-year fixed rate VA loan.
The entire process can take 6-12 months depending on factors like weather, materials availability, etc. Be sure to budget accordingly!
Finding a VA Construction Loan Lender
The first challenge is finding a lender who offers VA construction loans. These loans are less common than regular VA mortgages.
According to the latest data, some of the top national lenders offering VA construction loans include:
- Veterans United Home Loans
- New American Funding
- Freedom Mortgage
- Academy Mortgage
We recommend getting quotes from multiple lenders to shop for the best rates and fees. Be sure to ask potential lenders about:
- Construction loan amounts, terms, rates
- Required downpayments
- Allowed property types
- Any lender-specific requirements
Look for an experienced VA lender who can walk you through the entire unique process.
Using a VA Renovation Loan
If you want to purchase a fixer-upper home rather than building new construction, another option is a VA renovation loan.
This allows you to roll the home purchase price and renovation costs into a single VA loan. The renovation portion – up to $35,000 – is disbursed as the work is completed in stages.
To qualify, the home must still meet VA minimum property standards after renovations are done. This can be a great way to maximize your purchase power!
Alternative Options for Building a Home
What if you can’t find a lender willing to do a true VA construction loan? Don’t worry, you still have possibilities for tapping your VA loan to build a custom home.
Here are two options to consider:
1. Construction Loan to VA Refinance
With this option, you get a regular construction loan to finance the initial building phase. This likely requires a down payment.
Once the home is finished, you can then refinance into a permanent VA loan to get the benefits of 0% down and lower VA rates.
Shop around – some builders may offer special construction loan programs for veterans. Look for options to recoup your down payment when you refinance.
2. Purchase Land, then VA Cash-Out Refi to Build
Another approach is to purchase land first with a regular VA loan. After you own the land, you can get a VA cash-out refinance loan against it to fund construction costs.
The cash-out refi converts your base VA loan into a construction loan disbursed in stages. When complete, it becomes a new VA mortgage.
Just be aware, to qualify for a VA cash-out refinance, most lenders require you to have owned the home for at least 210 days.
Pros and Cons of Building with a VA Loan
Let’s summarize some of the key pros and cons to weigh when considering using your VA loan benefit to build vs buying an existing home:
Pros
- Design your ideal custom home
- Potentially build more house for your budget
- Brand new construction with warranty
- Lower interest rates than conventional construction loans
- Purchase land and build costs in one loan
Cons
- Construction delays and unknowns
- Generally higher rates than existing homes
- Builder must be VA-approved
- Extra steps and requirements throughout process
- Potentially less VA construction lenders to choose from
Building truly lets you create your dream home tailored to your needs. But it does come with more hassles and risks than buying a home already built. Make sure to prepare for setbacks that may happen during the construction process.
Is Building a Home Right for You?
Building a brand new custom home with a VA loan lets eligible veterans and service members design their ideal home. But it also comes with extra steps and requirements.
If you’re able to find a lender offering VA construction loans, the process can allow you to build your dream home with little-to-no money down. Just make sure you understand the risks and prepare for potential delays.
Weigh the pros and cons carefully to decide if using your VA loan to build a house is the right move for your goals and lifestyle.
What Is A VA Construction Loan?
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VA One-Time Close :: How To Get A Construction Loan With A VA Loan
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