Using a VA Home Loan to Build Your Dream Home

Building a custom home can be an exciting and rewarding experience. As a veteran, you have the unique opportunity to use your VA home loan benefit to finance the construction of your dream home. In this comprehensive guide we’ll walk through everything you need to know about using a VA loan to build a house from the ground up.

Overview of VA Construction Loans

The VA home loan program offers a specialized type of financing called a VA construction loan This loan provides short-term financing to purchase land and pay for construction costs Once the home is built, the construction loan converts to a permanent VA mortgage.

VA construction loans offer many advantages:

• No down payment required – The VA does not require any down payment for a construction loan, saving you thousands upfront.

• No private mortgage insurance (PMI) – Unlike conventional construction loans, VA loans don’t charge expensive PMI premiums

• Low rates – VA construction loans offer very competitive interest rates compared to other construction financing options.

• More flexible credit guidelines – The VA has more lenient credit standards than conventional loans. Minimum 620 FICO score is usually required.

• One-time or two-time close – You can opt for a one-time construction-to-permanent loan closing or separate construction and permanent loan closings.

• Access to experienced builders – Lenders maintain lists of VA-approved builders with proven track records.

VA Construction Loan Requirements

To qualify for a VA construction loan, you must meet the standard VA loan eligibility requirements:

• Be an eligible veteran, active duty service member, or surviving spouse
• Occupy the home as your primary residence
• Have sufficient income and credit qualifications
• Obtain a VA Certificate of Eligibility

You’ll also need to provide:

• Detailed construction plans and specifications
• A builder or contractor registered with the VA
• Permits, builder contracts, and other documentation

A key step is having the lender order a VA construction appraisal to ensure the home plans meet VA guidelines.

The VA Construction Process

The typical VA construction loan process follows these key steps:

1. Apply and get approved – Work with a VA lender to get pre-approved. Gather all required financial, income, and VA eligibility documents.

2. Submit construction plans – Provide complete blueprints and specifications from your builder to the lender for review.

3. VA appraisal – The lender will order a VA appraisal to verify the plans meet VA requirements and determine the home’s value.

4. Loan closing – Finalize the construction loan details and close on the loan. Closing costs may include up to a 2% construction fee.

5. Begin construction – After closing, the builder can break ground and start construction. The lender will distribute funds in draws as each stage is completed.

6. inspections – Mandatory VA inspections occur throughout construction until the home is finished.

7. Convert to permanent VA loan – Once construction is complete, convert to a permanent VA mortgage.

Choosing a VA Construction Lender

The biggest challenge is finding a lender that offers VA construction loans, as not all lenders provide this specialized financing. Tips for picking a lender:

• Search for local and national VA-approved lenders. Credit unions sometimes offer VA construction loans.

• Get rate quotes from multiple lenders to find the best deal. Compare fees and closing costs too.

• Look for an experienced lender with a strong track record and positive reviews.

• Ask about their construction loan process, appraisal timeline, draws, and permanent financing options.

• Inquire about one-time vs two-time closing options and associated costs/benefits.

From Construction Loan to Permanent VA Mortgage

Once construction is finished, you’ll need to obtain permanent financing through either a VA purchase loan or VA cash-out refinance. Here’s an overview of each option:

VA Purchase Loan

• Used for converting a construction loan into a standard VA mortgage

• The loan amount is limited to the home’s appraised value or the total cost to build

• Closing costs include the VA funding fee (2.3% for first-time users)

• No cash back is provided, but all your equity remains in the home

VA Cash-Out Refinance

• Lets you tap into your home’s new equity by refinancing the construction loan

• Loan amount can be up to 100% of the completed home’s appraised value

• Provides cash-out for leftover equity beyond the payoff amount

• Closing costs are higher than a VA purchase loan

• Best for those wanting to access equity to recoup costs

Tips for Success with a VA Construction Loan

Here are my top tips for ensuring a smooth process with your VA construction loan:

• Find a reputable builder familiar with VA guidelines and appraisal standards

• Research lenders thoroughly and compare loan estimates before committing

• Hire a real estate agent experienced with VA construction loans

• Get pre-qualified early and start the paperwork several months before building

• Overestimate construction costs and timelines to allow buffers

• Pay close attention to each stage of the building process

• Live within your means – don’t overbuild relative to your qualified loan amount

• Have a plan for permanent financing before you ever break ground

• Be ready to make loan payments if construction delays extend past closing

Why Use a VA Loan to Build?

Utilizing your well-earned VA home loan benefit to build a custom home is an exciting opportunity that more veterans are exploring. Here are some of the top reasons to consider using a VA construction loan:

• Build your perfect home – Design the ideal layout, features, aesthetics, and floorplan you want

• Potentially lower cost – In some cases, building is less expensive than buying an existing home

• Get a brand new home – Enjoy the newest systems, materials, and no worn-out components

• Good option with limited inventory – Construct a new home if you can’t find available existing homes to purchase

• Possibility of equity – Building gives you the potential to create instant equity in your property

• Strong resale value – Newly constructed homes often have high demand when it comes time to sell

The Bottom Line

VA construction loans give veterans a viable route to finance a custom-built dream home with zero down and optimized borrowing costs. Just be sure to connect with reputable lenders and builders to ensure smooth sailing through the construction process. If you lay the groundwork and manage the key steps, you can successfully utilize your VA loan to build your ideal home from the ground up.