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Purchasing a home is a major milestone for many people. However with limited housing inventory in today’s market, some buyers are having trouble finding a suitable existing home to buy. This has led more prospective buyers to consider building a new home instead. If you’re a veteran or service member you may be wondering if you can use your VA loan benefit to build a house. The answer is yes – with some caveats.
In this comprehensive guide, I’ll explain everything you need to know about using a VA loan to build a custom home. We’ll cover
- What is a VA construction loan?
- Requirements for VA construction loans
- How the VA construction loan process works
- What if you can’t find a lender to offer a VA construction loan?
- Turning a construction loan into a permanent VA mortgage
- Pros and cons of VA construction loans
Let’s get started!
What is a VA Construction Loan?
A VA construction loan is a mortgage that allows eligible borrowers to finance the building of a new home on land they already own or plan to purchase. It provides funding in stages as the home is built.
VA construction loans provide up to 100% financing, meaning no down payment is required. Borrowers also don’t have to pay private mortgage insurance (PMI).
These loans are beneficial for veterans and service members because they allow buyers to fully customize and personalize their dream home. However, VA construction loans can be difficult to obtain since not all lenders offer them.
Requirements for VA Construction Loans
To qualify for a VA construction loan, you must meet VA’s standard eligibility requirements:
- Be an eligible veteran, service member, or qualifying surviving spouse
- Have sufficient income and credit score
- Occupy the home as your primary residence
You’ll also need to provide:
- Certificate of Eligibility (COE)
- Approved builder registered with VA
- Complete set of construction plans and specifications
- Appraisal based on plans and specs
The builder must be licensed, insured, and registered in VA’s Builder Verification System. Custom home building is allowed.
How Does the VA Construction Loan Process Work?
The steps involved in getting a VA construction loan are:
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Get prequalified – Confirm you meet credit score and income requirements for the loan amount needed.
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Find a lender – Shop around to find a lender that offers VA construction loans. These can be hard to come by.
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Select a builder – Choose a VA-approved builder to construct your home. Provide their info to your lender.
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Provide plans/specs – Work with builder to develop floor plans, materials list, blueprints, etc. Submit to lender.
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Appraisal – The lender will order an appraisal based on the proposed plans for the home.
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Loan closing – Once VA issues the Notice of Value, the loan can close and construction can begin!
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Construction – The lender disburses payments to the builder in stages as work is completed.
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Final inspection – VA will inspect the finished home before converting construction loan to permanent mortgage.
It typically takes 45-60 days to close a VA construction loan. The construction phase will depend on the size and complexity of your home.
What if You Can’t Find a VA Construction Loan?
The biggest challenge with VA construction loans is finding a lender who offers them. Many lenders shy away from construction loans due to perceived risk.
If you don’t find a lender willing to do a true VA construction loan, there are a couple alternative options:
1. Get a conventional construction loan – This will likely require a down payment. Once home is built, you can get a VA loan to pay off the construction loan.
2. Owner-builder construction – Act as your own general contractor to build the home yourself over time. Get a VA loan once home is complete.
No matter what route you take, make sure to get VA guidance and approval throughout the process to ensure you can still use your benefits in the end.
Turning a Construction Loan into a Permanent VA Mortgage
For construction loans that aren’t structured as construction-to-permanent, you’ll need to convert to a permanent VA loan once the home is finished. This can be done a couple ways:
VA purchase loan – Pay off construction loan amount and get a new VA mortgage for any remaining costs, up to the home’s appraised value.
VA cash-out refinance – Refinance the construction loan into a VA mortgage, allowing you to take equity out if home appraises for more than construction costs.
The VA refinancing process is very similar to getting a regular VA purchase loan. You’ll go through the same VA underwriting guidelines.
Pros and Cons of VA Construction Loans
Pros
- 100% financing available
- No PMI required
- Customize your perfect home
- May recoup down payment for conventional loan
- Potentially cash-out refinance for equity
Cons
- Hard to find a lender that offers them
- More complex process than buying existing home
- No guarantees if acting as own contractor
- Additional closing costs for perm loan
- Risks if unable to complete construction
The Bottom Line
Despite some challenges, a VA construction loan can absolutely be a viable option for eligible service members and veterans to build their dream home.
The key is researching lenders, understanding guidelines/timelines, finding a qualified builder, and working closely with your VA loan specialist throughout the process. If you go in informed and prepared, you can successfully use your VA benefits to build your customized forever home.
Step 2: Choose a VA lender and get preapproved
The VA doesn’t lend money directly — private VA-approved lenders do that. You’ll apply through a bank, credit union or other kind of lender that offers VA loans. Keep in mind that it can be hard to find VA construction loan lenders, even if the lending institution does provide VA purchase loans.
“Start by having a conversation with the loan officer about your construction project and your qualifications,” says Thomas. “Have that loan officer review your income, assets and credit. Then, connect your mortgage loan officer with your builder to discuss the program.”
If you’ve been fortunate to find a lender, be sure to get preapproved for the loan. Here are the documents you should have on hand:
- Your COE
- Pay stubs
- Federal tax returns (for the last two years)
- Bank statements
- Statements from any investment accounts or retirement accounts
- Driver’s license or other photo ID
- Deed to the land, survey and settlement statement (if you already own the land)
- Purchase agreement for the land (if you haven’t purchased it yet)
- Construction contract with the builder
Step 3: Work with a VA-registered builder
To qualify for a VA construction loan, you must work with a VA-registered licensed and insured builder. (Usually, you can’t be considered the builder.) Your lender may have a list of builders that are already registered with the VA (meaning they have a VA Builder ID Number that tracks their performance). Or your lender may require your builder to go through the VA registration process.
“This program holds the builder responsible for completing the project on time and on budget,” says Thomas. “Not every builder will work with the VA terms.”
You can search for a VA-registered builder through the Veterans Information Portal. If you’re working with a builder that isn’t registered with the VA, ask the builder to submit the following items to the local VA Regional Loan Center to get a VA Builder ID number:
VA One-Time Close :: How To Get A Construction Loan With A VA Loan
FAQ
Can I use the VA home loan to build a home?
What credit score do you need for a VA construction loan?
How does a one-time close VA construction loan work?
What is the minimum FICO score for a construction loan?
Can I build a house using a VA construction loan?
To build a house using a VA construction loan, you must check with your loan officer or lender as every VA construction loan lender has specific requirements. For instance, mobile or manufactured homes are unlikely to be approved.
Can you buy a house using a VA mortgage?
A VA mortgage can be used to buy an existing home, but it also allows you to buy land and build a custom house as your primary residence with a VA construction loan. However, the VA only allows land purchase with its loan if home construction begins immediately.
Can you build a mobile home with a VA construction loan?
Generally speaking, mobile homes are not allowed for VA construction loans. Experienced VA lenders can provide additional details about what is allowed in terms of the type of home you can build with a VA construction loan.
Can a VA construction loan help you build your dream home?
For eligible borrowers, a VA construction loan can help simplify the process of building a dream home.