If you’re a service member or a veteran who wants to build your own home, a VA-backed loan could be the best way to go.
With a VA Purchase Loan, which is a benefit of your service, you can get financing to purchase land and to build your own home, all wrapped into one mortgage. In other words, you won’t have to apply for two separate loans.
Plus, there’s no down payment required, and VA Loans are often more affordable than other mortgages. The downside is that you’ll have to meet a long list of eligibility requirements that conventional lenders don’t have, including a complex application process.
Purchasing land to build a home on is an exciting prospect for many buyers especially military servicemembers and veterans who have VA home loan benefits. VA loans offer significant advantages like no down payment and no private mortgage insurance that can make buying land more affordable. But can you actually use a VA loan to buy land?
The short answer is yes, you can buy land with a VA loan under certain conditions. While the Department of Veterans Affairs won’t finance a “land-only” purchase, they will finance the purchase of land and the construction of a home on it simultaneously through a VA construction loan. There are also options like VA cash-out refinances that may allow you to buy land then construct a VA-approved home on it later.
In this comprehensive guide, we’ll cover everything you need to know about using a VA loan to buy land, including:
- How to buy land with a VA construction loan
- Requirements for using a VA loan to purchase land
- Pros and cons of buying land with VA financing
- Alternative options for buying land with your VA benefits
- Key differences from conventional land loans and construction loans
Let’s dive in!
Buying Land with a VA Construction Loan
The main way to buy land with a VA loan is to use a VA construction loan also known as a VA one-time close construction loan. This financing option allows you to roll the purchase of the land and the construction of the home into one VA mortgage.
Here’s an overview of the VA construction loan process:
- Get pre-approved for the loan amount needed to cover land purchase and construction costs.
- Find and purchase suitable land that meets VA requirements.
- Obtain VA approval of construction plans.
- Builder constructs home within one year while loan disburses periodic “construction draws.”
- Once home is completed, the construction loan converts to a permanent VA mortgage.
A key benefit of this approach is you don’t have to make any mortgage payments until construction is finished. The drawback is that your total loan term starts when construction begins, not when the home is completed. So if construction takes the full year, your 30-year loan becomes a 29-year loan.
It’s also important to note that not all VA lenders offer construction loans, so you’ll need to find one experienced with this type of financing.
VA Loan Requirements for Buying Land
To qualify for a VA construction loan to purchase land, you must meet all general VA loan eligibility criteria, including:
- Having the required length of military service
- Occupying the home as your primary residence
- Meeting lender credit and income requirements
- Having available VA entitlement
In addition, the land and construction plans must adhere to the VA’s minimum property requirements and guidelines. Some key requirements include:
- Land must have vehicular and pedestrian access via a public or private road.
- Land cannot have any easements or rights of way that restrict access.
- Builder must be VA-approved.
- Construction must be completed within 12 months.
- Home must meet all local building codes and zoning laws.
- Land in flood zones requires flood insurance.
- Land must have access to potable water and utilities.
The property cannot pose any environmental risks or hazards. And an appraiser must confirm the home meets VA property standards once built.
Pros and Cons of Buying Land With a VA Loan
Using VA-backed financing to buy land offers several notable advantages:
Pros
- Requires no down payment or mortgage insurance
- Has no monthly payments during construction phase
- Offers lower interest rates than conventional loans
- Has no minimum credit score requirement
However, there are also some potential drawbacks to weigh:
Cons
- Construction loans can be harder to find than standard VA loans
- More stringent VA construction guidelines to follow
- Loan term starts at beginning of build, shortening total length
- Monthly payments will be higher than a standard VA purchase loan
Overall, a VA construction loan can be a great option if you can meet all the requirements and find a knowledgeable lender. Just be sure to plan for the larger monthly mortgage payments once construction is finished.
Alternative Ways to Use VA Benefits for Land
If a VA construction loan doesn’t work for your situation, there are couple other ways you may be able to utilize your VA entitlement to ultimately build on purchased land:
Finance Land Separately, Then Obtain VA Construction Loan
One option is to finance the land purchase separately through a land loan, personal loan, or cash purchase. Then once you own the land, you can get a VA construction loan solely to finance building the home. This avoids strict VA land guidelines but means making payments on two loans.
Buy Land and Build Home, Then Refinance to a VA Loan
Alternatively, you can buy the land and pay for construction by securing a conventional land loan and construction loan. After the home is built to VA specifications, you can get a VA cash-out refinance loan to pay off the original mortgages. This allows you to end up with a VA loan on the home and land.
Key Differences from Conventional Land Loans
VA construction loans offer more flexible qualification terms than conventional land loans in a few key ways:
- Lower credit scores: VA has no set minimum score, while land loans often require 620+ scores.
- Lower down payments: VA requires none, while land loans may need 10-25% down.
- No mortgage insurance: VA does not charge monthly mortgage insurance premiums.
- No appraisal: VA uses reasonable value determinations instead of formal appraisals for land value.
However, conventional construction loans allow greater flexibility around property guidelines, builder requirements, and loan terms. VA construction loans mandate adhering to strict VA land and home specifications.
Is Buying Land With a VA Loan Right for You?
Using VA-backed financing to purchase land and construct a home can be an affordable option for eligible servicemembers and veterans. Just be prepared to find an approved lender, meet all VA requirements, and budget for larger monthly payments.
Carefully weigh the pros and cons and look at alternate methods of tapping your VA benefits if needed. Buying land on your own, then refinancing later may offer more flexibility. But if you can qualify for a VA construction loan, it provides unparalleled affordability in one comprehensive mortgage package.
Hopefully this guide gave you a clear overview of what’s required and what to consider when using VA loans to buy land. It can be done, but involves extra steps compared to a standard home purchase. Do your due diligence upfront to ensure the land you want will be eligible for VA financing. With proper planning, you can use your hard-earned benefits to buy your dream property and build your ideal home!
Builder Must Be Registered With The VA
When you use a VA loan to build a residence, you can choose your own builder, but you’ll have to work with individuals who are registered with the VA.
Beyond the VA’s requirements, your lender may also have requirements for the builder, including certain licensing or insurance requirements.
Income and Credit Score
The VA doesn’t have a minimum credit score you must meet to qualify for a loan, but your lender will need to approve you based on their own credit score requirements. That means you may want to work on improving your credit scores before applying.
In addition to that, the lender will determine what you can afford based on your income and assets.