How to Get a VA Construction Loan to Build Your Dream Home

Getting a VA construction loan can help veterans and service members build their dream home With a VA construction loan, you can purchase land and finance the construction of a new home without needing a down payment.

VA construction loans offer many benefits but can also have more complex requirements than typical VA loans This comprehensive guide will explain everything you need to know about getting a VA construction loan

What is a VA Construction Loan?

A VA construction loan is a mortgage that allows eligible borrowers to buy land and build a new home that will become their primary residence. It provides short-term financing for the construction period, which is usually around 12 months.

These loans are backed by the Department of Veterans Affairs loan guarantee program Since the VA guarantees a portion of the loan, lenders can offer more flexible terms compared to conventional construction loans

Some key features of VA construction loans include:

• No Down Payment – The VA does not require a down payment for construction loans in most cases. This can save you tens of thousands upfront.

• No Mortgage Insurance – You don’t have to pay private mortgage insurance (PMI) with a VA loan. This can save you hundreds per month.

• Competitive Rates – VA construction loans rates are very close to rates for traditional 30-year fixed-rate mortgages.

• Funding Fee – The VA charges an upfront funding fee of 2.3% of the loan amount for first-time use. This can be financed into the loan.

• ** Converts to Permanent Mortgage** – Once construction is finished, the loan converts to a permanent VA mortgage.

VA Construction Loan Requirements

Although VA construction loans offer more flexible borrowing standards than conventional options, you still need to meet the program’s requirements:

• Eligible Borrower – You must be an eligible veteran, service member, or qualifying surviving spouse. Basic VA home loan eligibility rules apply.

• Certificate of Eligibility – You’ll need a valid COE issued by the VA to confirm your eligibility.

• Credit Score – Most lenders require a minimum 620 credit score for VA construction loans. The VA itself does not mandate a certain score.

• DTI Ratio – Your debt-to-income ratio must generally be below 50%. But some lenders may want it even lower for construction loans.

• Stable Income – You’ll need stable income that is verifiable through documents like paystubs, W-2s, and tax returns. Two years of employment history is preferred.

• Registered Builder – Your builder must be registered with the VA and adhere to the construction process required for VA loans.

• One-Time or Two-Time Close – VA construction loans can be structured as a one-time or two-time close. This determines when VA funding fees are due.

Meeting these requirements upfront will make getting approved much easier. Be sure to check with lenders to see if they have any overlays on top of the VA’s standards.

Uses for VA Construction Loans

Veterans and service members can use VA construction loans in a few different ways:

• Building a Home on Owned Land – If you already own land or will purchase it with your own funds, a VA construction loan can finance just the building of a new home on that lot.

• Buying Land and Building a Home – VA construction loans can finance both the purchase of land and the construction of a home on that land. This route requires more coordination but allows you to buy land.

• Custom Home Construction – These loans support building a fully custom home. You can choose the design features, layout, materials, and more.

• Manufactured Home on Owned Land – Veterans can use construction financing to place a manufactured or modular home on land they already own.

No matter what construction project you have in mind, speak to a lender to see if it can be financed with a VA construction loan.

VA Construction Loan Process

Getting a VA construction loan to build a home involves a multi-step process:

1. Apply and Get Pre-Approved

First, find a lender that offers VA construction loans and apply for pre-approval. This gives you a loan estimate so you know your potential borrowing power.

2. Purchase Land If Needed

If you don’t already own the land to build on, you’ll need to buy a lot. This can be done as part of the VA construction loan.

3. Design Home and Hire Contractor

Work with an architect and general contractor to design your new home. Be sure to use a registered VA builder familiar with the program’s requirements.

4. Submit Home Plans for VA Review

Your lender will submit your final home plans and specs to the VA for review. This is to confirm the home meets the VA’s minimum property standards.

5. Obtain Permits and Break Ground

After getting VA approval, the builder can obtain necessary permits and start preparing the lot. Construction can then begin per the approved plans.

6. Get the Home Constructed

It typically takes 6-12 months to fully build a home. The lender will make periodic disbursements from your loan to pay the builder for completed work.

7. Complete VA Inspections

The VA will conduct inspections at several stages during construction to ensure work meets requirements. The home must pass final inspection.

8. Transition to Permanent VA Loan

Once construction is finished, the construction loan converts to a permanent VA mortgage. You’ll need to go through another closing for this.

Getting Started with a Construction Loan

If you want to build a custom home with a VA construction loan, follow these key steps:

1. Get Your COE from the VA

You can’t get a VA-backed loan without a Certificate of Eligibility (COE) from the Department of Veterans Affairs. Apply for this document first as it can take a few weeks to issue.

2. Check Your Credit and Income

Make sure your credit score is at least 620 and that you have stable income to qualify. Take steps to improve your credit or financial situation if needed.

3. Research VA Construction Lenders

Not all lenders offer VA construction loans, so you need to find one that does. Ask local banks and mortgage companies or search online.

4. Apply and Get Pre-Approved

Submit a full application with income and asset documents to get pre-approved. This shows the amount you can borrow based on the lender’s underwriting.

5. Interview and Hire a Contractor

Only use a VA-approved contractor familiar with the construction process. Get multiple bids and check references before selecting a builder.

6. Design Home Plans

Create a floor plan, choose finishes, and make all design decisions. Your lender and appraiser will review plans as part of the approval process.

With the right preparation, you can utilize a VA construction loan to build the custom home you’ve always dreamed of. Just make sure you understand the entire construction process and requirements.

Finding the Best VA Construction Loan Lender

The lender you choose for a VA construction loan can greatly impact your experience and satisfaction. Here are some tips on picking the best VA construction lender:

• Ask local real estate agents, home builders, and other veterans for lender referrals.

• Look for an established lender with a long history of offering VA construction loans specifically.

• Compare interest rates from at least 3 lenders to find the best deal.

• Ask about fees – some lenders charge very high origination or lender fees.

• Inquire about their construction loan process and servicing. Make sure they have strong processes in place to support you during building.

• Look for responsive loan officers who understand the VA construction program in-depth.

• See if they offer one-time or two-time close options and choose what works best for you.

• Ask how long they take to approve construction draws and release payments to your contractor.

Finding the right lender for your VA construction loan can ensure the process goes smoothly from start to finish.

Permanent Financing for Your VA Construction Loan

Once your home is built, the VA construction loan needs to convert to separate permanent financing. You have two main options at this stage:

VA Purchase Loan

You can get a standard VA purchase loan once construction is complete. The home would be appraised at its full market value. You’d go through an additional closing with this option.

VA Cash-Out Refinance

Another option is to do a VA cash-out refinance for up to 100% of the new home’s appraised value. This lets you pay off the interim construction loan while taking some cash out if desired. There is just one closing.

Talk to your lender early about the best permanent financing choice for your situation. They can explain the costs, pros, and cons of each approach.

New Construction Purchase vs. Cash-Out Refinance

Here is a quick comparison of utilizing a VA purchase loan versus VA