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Homebuyers are not limited to using a conventional loan. U.S. active-duty military service members, reservists or National Guardsmen, veterans and eligible surviving spouses can take advantage of the Veterans Affairs (VA) loan program.
VA loans help military members and their families achieve homeownership with no down payment or private mortgage insurance required. But VA loans can be used for purposes other than buying an existing home, such as buying land and building a new home.
Buying land and building a custom home is a dream for many homebuyers. With historically low inventory in many markets, more buyers are exploring this option. For eligible veterans and service members, VA loans can help make this dream a reality. But it also involves some unique hurdles and requirements.
In this complete guide, we’ll walk through the ins and outs of using a VA-backed loan to buy land and build a house from the ground up
Can You Buy Land with a VA Loan?
The VA has specific guidelines around purchasing vacant land with a VA-guaranteed mortgage. In most cases, veterans cannot use their VA home loan benefit solely to purchase land on which they intend to build a home later
However, it is possible to buy land and build a home in what the VA refers to as a “continuous transaction.” This means you must have immediate plans to build on that land and apply for the construction financing together in one complete VA loan package.
Essentially, eligible buyers can use their VA home loan benefit to finance the purchase of land and construction of a home on that land simultaneously. You cannot buy land now with plans to build on it years down the road. The purchase of the land and construction financing must happen together.
This is one of the key hurdles and misconceptions we see from veterans exploring VA construction loans. You cannot buy land now with a VA purchase loan and build later with VA construction financing. It needs to happen concurrently.
VA Loan Requirements to Buy Land and Build
Beyond meeting all the standard VA loan requirements, buyers will need to clear some additional eligibility checks to buy vacant land and build a home with VA financing.
These include:
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Construction plans: Complete building plans, specs, budget and more need to be submitted to the lender upfront. Many lenders will want to see permits in place as well.
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VA appraisal: The lender will order a VA appraisal, but this is based on the home plans and land value, not an existing home. Some key figures from the appraisal like the home’s estimated value will factor into the loan amount and other details.
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Builder requirements: VA loans require that an approved VA builder constructs the home. More on this below.
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Additional VA policies: Beyond the standard VA underwriting, VA construction loans involve some other policies like requiring a final inspection when the home is complete.
Meeting standard VA loan requirements is a must. Our VA loan eligibility calculator makes it easy to check things like your service requirements, whether you have a VA entitlement to use and more. Beyond that, work closely with a lender familiar with VA construction loans to ensure you pass all the additional checks involved with buying vacant land and building a home.
How to Find a VA Loan for Construction
This can prove challenging. Many lenders shy away from construction loans and financing vacant land purchases. Even lenders that handle VA loans may not offer VA construction financing products.
Veterans United, the nation’s top VA lender, does not currently make VA construction loans ourselves. But we do have options to help eligible buyers finance the construction of a new home using their VA loan benefit.
If you’re struggling to find a lender willing to underwrite a true VA construction loan, here are some alternate routes to consider:
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Get a construction loan first: Work with a local lender or builder to get a conventional construction loan that you later refinance into a VA mortgage once the home is complete. The construction loan will likely require a down payment.
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Consider owner-builder construction: Veterans can act as their own general contractor in many cases. This can help meet the VA builder requirements outlined below and may open up additional financing options. Some lenders offer construction financing programs specific for owner-builders.
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Research state and local programs: Some states, counties, and towns offer low or no down payment construction financing options for eligible buyers, including active duty service members and veterans. These can potentially be combined with VA financing.
Shop around and talk to banks, credit unions, builders and real estate agents to learn about available construction lending programs in your area. Don’t limit the search to VA lenders. Exhaust all options.
VA Builder Requirements
The VA has requirements around the builders involved with VA construction loans. All builders must register for a VA builder ID number. The process takes just a few days in most cases.
The VA maintains a list of approved builders on their website: https://vip.vba.va.gov/portal/VBAH/VBAHome/newhomebuyers/builders
In addition to registering, here are some other VA policies around builders on new construction loans:
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The builder should provide a one-year warranty on the new home.
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Veterans can act as their own builder. This is referred to as an owner-builder arrangement.
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The builder does not need to be a licensed general contractor in all cases, but they will need to prove they have the experience and skills to complete the project.
Lean on your lender and real estate agent for guidance around builder requirements. Provided they meet VA policies, owner-builder arrangements can be a great option for eligible veterans looking to cut costs and be more hands-on in the construction process.
VA Construction Loan Process
Every construction project has unique details and timelines, but the general process for getting a VA construction loan to build a home typically follows this order:
1. Find the Right Lender
This first step can be the biggest challenge. Once you find an experienced lender familiar with VA construction lending, they’ll guide you through their application, underwriting and closing process.
2. Submit Construction Plans and Details
Your lender will want to see finalized construction plans, details around the builder, permits, expected budget and more very early on. These plans and specs will be used for the critical VA appraisal step.
3. Land and Home Appraisal
The lender will order a VA appraisal. For construction loans, the appraiser will estimate the future value of the home based on the final plans and specs along with provide a value for the land. The appraisal determines the maximum loan amount.
4. Loan Closing and Land Purchase
With a true VA construction loan like those offered by a limited number of national lenders, the buyers will close on the full construction financing before breaking ground. This closing will include the purchase of the land in most cases.
5. Building Phase
The builder starts construction after closing. If all goes to plan, the homeowner moves in upon completion. Some lenders may require periodic inspections during key phases of the project.
6. Final Inspection
The VA requires a final inspection of the home by the original appraiser to ensure it was built according to the approved plans and meets the VA’s minimum property standards.
Every lender and each construction loan scenario features unique details. Maintain constant contact with your lender and lean on the advice of your real estate agent and builder throughout the process.
Alternatives When VA Construction Loans Fall Through
As mentioned above, finding a lender to underwrite a true, one-time close VA construction loan can prove challenging in today’s market. Don’t give up if that initial VA construction loan search comes up empty. You likely have alternatives.
Here are two options we help veterans explore if we’re unable to approve them for one of our VA construction financing programs:
1. Construction Loan Then VA Cash-Out Refinance
One very common route is for a buyer to get a conventional construction loan first that requires both a down payment to build and higher interest rate. Once the home is complete, the buyer can then refinance into a permanent VA mortgage.
Many lenders allow veterans to cash-out refinance up to 100% of the home’s appraised value. This means eligible buyers can often get their down payment back while also securing a lower VA interest rate.
Yes, it involves two closing and two sets of closing costs. But for many buyers, it’s an excellent option for building a custom home with their hard-earned VA financing.
2. Construction Loan to VA Purchase Loan
Another option is to get a short-term construction loan initially and then have your lender process the permanent financing as a traditional VA purchase loan.
The construction loan covers the down payment and construction financing. Once complete, your VA lender calculates the home’s final payoff and shops that against the home’s appraised value to determine the final VA loan amount.
One downside is that buyers are less likely to get their original down payment back, which could make the cash-out refi route more appealing for eligible buyers.
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The process of finding land, securing financing, building a home and finally moving in is not always
How To Use a VA Loan To Buy Land
In most cases, you can use a VA construction loan to buy land and pay construction costs. After the home is built, this loan is converted into a permanent VA loan.
A VA-approved lender will finance the construction of the home and land simultaneously. However, before the builder receives any payment, the lender obtains written approval from the borrower at each disbursement. You must close on a VA construction loan before construction can begin. The newly constructed home must be inspected by a VA-approved home inspector at the end of the process.
One perk with a VA construction loan is that you won’t start making payments until after construction is complete. This could give you a bit of breathing room, but keep in mind this could mean larger monthly payments in the long run. For example, let’s say it takes six months to complete construction and you have a 30-year loan. This means your repayment will take 29 years and six months. You might get a buffer when repayment starts, but your final payment date doesn’t change.
VA construction loans offer multiple draw periods, where the lender makes regular payouts to the builder with the borrower’s approval.
Alternatively, you can purchase land with a different form of financing, such as a conventional mortgage, then use a VA construction loan to build the property. Once the property is completed, you can refinance both loans into a permanent VA loan.
If you want to avoid the red tape of a VA construction loan, you can use a short-term conventional loan to buy land and build a new home. As long as the finished property and land meets the VA’s minimum property requirements, you can refinance the conventional mortgage into a VA loan.
Can You Buy Land With a VA Loan?
You can’t use VA loans solely to buy land. However, you can use a VA construction loan to buy land and build a new home. Once the home is built, the construction loan is converted into a permanent VA loan.
VA loans offer military homebuyers some unique perks, such as 0% down, no mortgage insurance requirement, competitive interest rates from VA-approved lenders and maximum closing costs. However, the VA sets strict rules for the type of home you can build and the land itself.