How to Finance New Home Construction with a VA Loan

Buying or building a brand new home can be an exciting prospect for many homebuyers. With today’s competitive housing market and low inventory levels having a home built from the ground up may be an appealing option, especially for military servicemembers and veterans who want to utilize their VA loan benefit.

While VA loans are commonly used to purchase existing homes, they can also be used to finance new construction under certain circumstances. In this comprehensive guide, we’ll explore how VA loans work for new construction, limitations, alternative options, and tips for Veterans and military families navigating the process.

What is a VA Construction Loan?

A VA construction loan allows eligible borrowers to finance the purchase of land and construction of a new home in a single loan without requiring a down payment. It is issued by a lender approved to offer VA loans and provides up to 100% financing for qualified borrowers.

With a true VA construction loan there is a single closing before construction begins. The lender disburses payment draws over the course of construction until the new home is completed and ready for occupancy.

VA Construction Loan Basics and Requirements

Here are some key things to know about VA construction loans:

• For primary residence only: VA construction loans can only be used to build a home that will serve as your primary residence.

• Meet general VA loan requirements: Borrowers must meet VA’s standards for credit score, income, debt-to-income ratio and prior foreclosure waiting periods.

• Find a VA-approved builder: The home must be built by a licensed builder approved by VA and registered in the department’s database. Most established builders have little trouble getting VA approval.

• Appraisal based on plans/specs: The lender will order a VA appraisal based on the final construction plans and specifications. The appraiser determines the home’s expected value when completed.

• VA’s final inspection required: VA conducts a final inspection to ensure the home is built according to approved plans and meets VA minimum property standards.

While these loans offer great benefits, the biggest challenge is finding a lender that actually offers VA construction loans. Many lenders shy away due to perceived risks.

Alternative Options for New Construction

Because VA construction loans can be difficult to obtain, many borrowers pursue alternate options:

Traditional construction loan + VA refinance

• Get a conventional construction loan requiring a down payment
• Once home is finished, refinance into a permanent VA mortgage
• Down payment may be recouped in cash-out depending on appraisal

Purchase land outright + VA construction perm loan

• Use cash or non-VA loan to purchase land
• Work with lender offering VA one-time close construction loans
• No need to refinance once home is built

VA land loan + construction loan

• Use VA entitlement to purchase land with no down payment
• Finance construction with separate loan from builder lender
• Again, refinance into permanent VA loan when home is completed

Each approach has pros and cons to weigh for your personal financial situation. The key is understanding your options so you can make an informed decision.

Step-by-Step Process for Building with a VA Loan

While every homebuilding experience is unique, the general process typically follows this basic order:

1. Find a lender. Identify a lender that offers VA construction loans or alternate financing options. Get pre-approved to determine your budget and financing options.

2. Purchase land, if you don’t already own it. This can be included in the construction loan or purchased separately with cash or financing.

3. Select a qualified builder. Research experienced builders in your area that are approved by VA. Get multiple bids and check references thoroughly. Never pay more than 10% upfront.

4. Finalize plans/specs. Work with your builder to finalize house plans and specifications down to finishes, fixtures and more.

5. Appraisal and loan approval. The lender will order a VA appraisal based on the final plans. Provided the home meets guidelines, underwriting will approve the loan.

6. Construction phase. The builder will begin construction once permits are secured. Expect regular inspections from the lender to approve payment draws.

7. VA final inspection. When construction nears completion, VA will conduct a final inspection to ensure the home meets guidelines before approving occupancy.

8. Closing and move-in. With a traditional construction loan, you’ll close on VA financing and move in once the home is finished. With a construction-perm loan, closing happens upfront before building starts.

Tips for Streamlining the VA Construction Process

Building a home with a VA loan has more moving parts than buying an existing house. Here are some tips to help streamline the construction process:

• Start with land purchase. Buy land with cash or a separate loan so it’s secured when applying for construction financing.

• Get fully approved upfront. Going through full underwriting for approval early on can speed things up when it’s time to actually build.

• Choose builder wisely. An experienced builder familiar with VA guidelines can help expedite required steps and avoid delays.

• Communicate frequently. Maintain constant contact with your lender and builder throughout the process to address any issues quickly.

• Allow extra time. Building a home takes longer than buying a resale. Make sure to budget additional time for construction delays and snags.

• Limit changes. Avoid making design changes mid-build whenever possible. Alterations can lead to extra costs and timeline extensions.

Key Benefits of Using a VA Loan for New Construction

While it can be more complex, there are significant advantages to using your VA home loan benefit to build versus buy:

• Maximize your VA entitlement – Build your ideal home while taking advantage of the unique VA perks like no down payment and no monthly mortgage insurance

• Get exactly what you want – Build new with custom features and layouts, rather than compromising on an existing resale home

• Potentially recoup down payment – If a VA refinance option is utilized, any initial down payment required by the construction lender may be available for recapture once construction is complete

• Take advantage of current rates – Lock in a long-term fixed rate mortgage with today’s still historically low rates

• Leverage builder incentives – Many builders offer deals and discounts, especially for active military and Veterans

• Create instant equity – Brand new construction often appraises for more than its building cost, allowing you to build equity from day one

For Veterans and military homebuyers willing and able take on the process, using VA financing to build a custom home can be an optimal way to achieve housing goals while making the most of hard-earned benefits.

Finding a Lender That Offers VA Construction Loans

The first hurdle to financing new construction with a VA loan is finding a lender that provides these specialized products. Here are some tips for locating VA-approved lenders that offer construction loans or alternative options:

• Ask your trusted real estate agent for lender recommendations in your area
• Search online for “VA construction loans near me” and vet company reviews
• Connect with the nearest VA regional loan center to request a lender referral
• Check with large national lenders that operate in all 50 states
• Contact local community banks and credit unions about options

Be sure to ask potential lenders specific questions about their experience with VA new construction loans, down payment requirements, and single versus two-close options. An experienced VA lender can walk you through all the steps and help optimize the home financing process.

Wrapping Up

Building a new home with a VA loan can empower eligible borrowers to get the perfect house while maximizing affordability. But it does require some extra legwork, preparation, and coordination compared to buying an existing property.

Doing your homework upfront on VA guidelines, researching reputable builders in your area, finding the right lender, and budgeting extra time can help set your construction project up for success.

While a true VA construction loan may be difficult to source, Veterans and military members have options like conventional construction financing. This can provide the funds needed to build, while still allowing you to end up with a permanent VA mortgage once the home is move-in ready.

Despite some hurdles, tapping into your VA loan benefit offers significant advantages when building from the ground up. Connecting with an experienced VA lender early on can streamline the journey to achieving your dream of a custom-built home.