Can I Build a Home with a VA Loan?

If you’re a veteran or active military service member looking to build your dream home, you may be wondering if you can use your VA home loan benefit to finance new construction The short answer is yes, you can build a home with a VA loan under certain conditions.

VA loans are guaranteed by the Department of Veterans Affairs and offer significant advantages like no down payment and no private mortgage insurance requirements. These features make them extremely popular home financing options.

While it is possible to get VA-backed financing to build a home, the process is often more complex than using a VA loan to buy an existing house. VA construction loans can be challenging to find and require meeting extra requirements.

In this article, we’ll break down everything you need to know about using your VA home loan benefit to build a custom home.

What is a VA Construction Loan?

A VA construction loan is a short-term financing option that allows eligible borrowers to buy land and build a home from the ground up. These loans are backed by the VA, just like regular VA mortgages used to purchase existing homes.

With a VA construction loan:

• You can finance up to 100% of the land purchase and construction costs. No down payment is required.

• The loan term is shorter than a typical 30-year VA mortgage. For example, 12 or 18 months.

• Loan funds are disbursed in stages as construction is completed.

• Once the home is finished, borrowers get permanent VA financing to pay off the construction loan.

VA construction loans let military buyers avoid large down payments and get their dream home tailored to their needs. However, relatively few lenders offer these specialized loans today.

VA Construction Loan Requirements

To qualify for VA new construction financing, borrowers must meet all the standard VA loan requirements, including:

• Service requirements like minimum time in service
• Income and credit guidelines
• VA entitlement available

You’ll also need to provide additional documentation, such as:

• Detailed construction plans and specs
• Builders risk insurance information
• VA builder ID number

The property must be built by a VA-approved builder. The VA reviews the plans and issues a Certificate of Reasonable Value based on the specifications.

The VA Construction Loan Process

If you find a lender offering VA construction financing, here are the typical steps to get your new home built:

1. Get prequalified – Confirm you meet VA requirements and get preapproval for the loan amount needed.

2. Find land – Identify and get under contract on the lot where you’ll build the home.

3. Select a VA-approved builder – Research builders and choose one registered in the VA’s database.

4. Provide plans/specs – Work with the builder to finalize the home design, floor plans, features, etc.

5. Appraisal – The lender will order a VA appraisal of the plans and issue a Reasonable Value notice.

6. Loan closing – Close on the construction financing before construction starts.

7. Construction – The home is built in stages while the lender disburses payments to the builder accordingly.

8. VA inspection – When construction is complete, the VA will inspect the home before you can move in.

9. Permanent financing – You’ll need to convert the construction loan into a permanent VA mortgage once the home is finished.

While it may seem daunting, following these steps with a knowledgeable lender can make building a home with VA financing achievable.

Alternatives if You Can’t Find a VA Construction Loan

These days VA construction loans can be difficult to obtain since many lenders shy away from the risks involved. If you have trouble finding a lender offering true VA construction financing, there are a couple alternative options to build a home using your VA benefits:

Option 1: Construction Loan to VA Cash-Out Refinance

1. Get a traditional construction loan for the build requiring a down payment
2. Complete construction and hold title to the property
3. Cash-out refinance into a VA loan – may get cash back depending on appraisal

Option 2: Construction Loan to VA Purchase

1. Get a traditional construction loan for the build requiring a down payment
2. Have the property appraised when construction is done
3. The lender issues a VA purchase loan for up to the appraised value to pay off the construction loan

These options allow you to tap into your VA entitlement. While you may need funds for a down payment up front, you end up with a VA loan in the long run.

Pros and Cons of Building a Home with a VA Loan

Pros

• Zero down payment options on the construction and permanent financing
• Potentially lower rates than conventional construction loans
• Avoid monthly PMI payments
• Get a home tailored exactly to your specifications

Cons

• Limited number of lenders offer VA construction loans
• Short loan terms require refinancing into permanent VA loan
• Extra steps and requirements compared to buying an existing home
• No option to be your own general contractor

Tips for Building a Home with a VA Loan

If you’ve weighed the pros and cons and decided to pursue new construction with a VA loan, keep these tips in mind:

• Contact lenders early to find one that offers VA construction financing.
• Research VA requirements for builders, plans, appraisals, etc. so you’re prepared.
• Be ready to refinance into a permanent VA loan once construction is complete.
• Get quotes from multiple builders to find the best deal.
• Work with an experienced real estate agent familiar with the new construction process.
• Be conservative with design choices – avoid over-customizing.
• Build up savings to cover cost overruns that may pop up.

The Bottom Line

Building a home with a VA construction loan is possible for eligible military borrowers. While the process is more complex than purchasing an existing home with a VA loan, it allows you to get the house of your dreams designed specifically for you and your family.

If you’re up for the challenge, connect with lenders to see if VA new construction financing may be an option for making your dream home a reality.