If your military service qualifies you for Veterans Affairs benefits, you probably know you can use a VA loan to buy a home. What you may not know is that those benefits also include a VA construction loan that you can use to buy land and build your own home.
Read on to learn more about how VA construction loans work, how to get one, and the pros and cons of this mortgage type.
Purchasing land and building a custom home can be an exciting prospect for many veterans and military service members. With a VA construction loan eligible borrowers can finance up to 100% of the cost to buy land and construct a new home without any down payment required.
But not all lenders offer VA construction loans So you may be wondering – who actually provides financing to build a home using your VA benefits?
In this comprehensive guide, I’ll explain what VA construction loans are, who qualifies to use them and tips for finding a lender that provides these specialized loans.
What Are VA Construction Loans?
VA construction loans are a type of financing that allows eligible borrowers to buy land and build a home from the ground up. They are issued for a short term – usually around 12 months – to cover just the construction phase.
Once the new home is move-in ready, the construction loan must be converted to permanent financing. This is usually done by obtaining a traditional VA mortgage.
VA construction loans offer several advantages:
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No Down Payment Required: No money down is needed to qualify, unlike most other construction loans.
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No Private Mortgage Insurance: Mortgage insurance is not required, saving borrowers substantial costs.
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Lower Closing Costs: VA loans offer lower upfront fees versus conventional loans.
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Relaxed Guidelines: Credit and income requirements are more flexible compared to other construction loans.
However, VA construction loans can be harder to obtain since not all lenders provide this kind of financing.
VA Construction Loan Eligibility
To qualify for a VA construction loan, you must first meet the basic VA loan requirements:
- Served at least 90 consecutive days on active duty during wartime
- Served at least 181 days during peacetime
- Have at least 6 years in the National Guard or Reserves
- Be the surviving spouse of a service member who died in the line of duty
You’ll also need a valid Certificate of Eligibility (COE) to prove your service.
In addition to the standard VA loan qualifications, VA construction loans have a few extra requirements:
- Have plans drawn up by a licensed architect or draftsperson
- Use a builder approved by VA for new construction
- Get the plans appraised to ensure the home meets VA standards when complete
- Occupy the home as your primary residence when construction is finished
VA does not actually issue the construction loans themselves. You’ll need to find a private lender willing to provide the financing.
The Challenges of Finding a VA Construction Lender
The biggest hurdle with VA construction loans is locating a lender that offers them. Out of all the different types of VA loans, construction loans tend to be the most difficult to obtain.
Most mortgage lenders shy away from construction loans in general because they come with higher risks compared to financing existing homes. And lenders that do offer construction financing often don’t provide VA versions.
According to the U.S. Department of Veterans Affairs, only around 100 lenders in the entire country do VA construction loans. So they can be challenging to track down.
Large national lenders and banks typically don’t provide VA construction financing. You’ll have the best luck searching for small, local lenders familiar with these niche VA loans.
Online lenders focused on serving veterans and military also offer better chances of approval. But make sure to verify licensure and read reviews before applying.
Tips for Finding a VA Construction Lender
Here are some tips to help you locate a lender willing to finance the construction of your dream home using your VA benefits:
Check if your current lender offers VA construction loans. If you already have a relationship with a lender, see if they provide this type of financing. Make sure to ask upfront before completing a full application.
Search VA’s lender database. VA maintains a list of approved lenders on their website. You can filter by construction loans to identify potential lenders.
Look for local lenders. Smaller community banks and credit unions are more likely to handle VA construction loans. Search for lenders located near where you plan to build.
Contact your state’s VA office. The VA representatives in your state can sometimes provide referrals to lenders that offer VA construction financing.
Ask your real estate agent for recommendations. Experienced agents may know lenders in your area that provide VA construction loans.
Search online forums. Veterans in online communities often share tips on lenders offering VA construction financing. But make sure the info is current.
Consider mortgage brokers. Brokers have relationships with multiple lenders and can shop around to find a VA construction loan.
Be prepared to apply to multiple lenders. You may need to complete several applications before finding a lender that will approve a VA construction loan.
The VA Construction Loan Process
If you’re able to connect with a lender providing VA construction financing, here are the typical steps involved:
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Get pre-qualified. The lender will want to verify your credit, income, and overall eligibility for a VA loan before proceeding.
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Find land to purchase. Identify the property where you plan to build the home. It must be zoned for residential use.
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Select a VA-approved builder. Your builder must be registered with VA and provide their VA ID number.
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Provide construction plans. Detailed plans for the home must be drawn up and submitted for approval.
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Order a VA appraisal. The lender will have the plans appraised by a VA appraiser to determine the value once built.
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Close on the land loan. This closes the loan for purchasing the lot or land.
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Close on the construction loan. The construction loan closes, providing financing for completing the build.
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Draw loan funds as needed. The lender disburses payment to the builder in stages as construction milestones are met.
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Complete construction. Once the home is finished, the builder requests a final inspection.
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Obtain permanent financing. You must convert the construction loan into long-term financing once the build is done.
The construction phase typically takes 6 to 12 months but can vary based on the complexity of the project. The permanent VA mortgage payments would begin after construction is completed.
Alternatives if You Can’t Get a VA Construction Loan
If you have your heart set on building a home but can’t obtain VA construction financing, there are a couple alternative options to consider:
Conventional Construction Loans
One choice is a conventional construction loan from a lender not requiring VA approval. You can look into FHA, USDA, or standard construction loans. Just keep in mind you’ll likely need a down payment of 10-20%.
Two-Step Financing
Another approach is separate financing for purchasing the land and construction. You buy the lot with a traditional mortgage, then get a construction loan for the build. Once done, you can refinance into a permanent VA loan.
Neither option provides the full benefits of a VA construction loan. But they do allow you to move forward with building a custom home using your VA entitlement in other ways.
Finding the Right Lender is Key
VA construction loans offer a fantastic opportunity for eligible borrowers to build a brand new home with no money down. But finding a lender willing to provide the financing can prove challenging.
Following the tips above improves your chances of connecting with a lender offering VA construction loans. Be prepared for a longer process and multiple loan applications. But if home building is your dream, a VA construction loan can make it achievable.
Pros And Cons Of VA Construction Loans
Look at the pros and cons of building a house funded by VA loans before deciding if itâs the right option for you.
Loan benefits include a low down payment, lenient credit requirements, low interest rates, and closing costs that can be rolled into the loan.
You can get a VA construction loan with no down payment required. However, it may depend on your lender, credit score and financial situation. You will be required to pay a funding fee unless youâre exempt.
VA loans are generally easier to get approved, with a lower credit score requirement than other construction loans and a higher allowable debt level. Note that lenders are free to set their own requirements for a VA construction loan.
You can typically get a VA loan for a slightly lower interest rate than a conventional loan. However, your lender will consider your entire profile, including your credit score, DTI ratio and residual income.
You may be able to roll some VA closing costs into your loan. On average, closing costs typically total 2% to 5% of the purchase price.
Your specific closing costs depend on your loan type and location. When you roll your closing costs into your loan, you push your closing costs into the mortgage, which creates a larger loan amount. That means you may pay more total interest over the life of the loan and have higher monthly loan payments.
One of the requirements of a VA loan is the upfront funding fee, a typical fee requirement that borrowers may need to pay to help financially support and sustain the home loan program. Some individuals may not have to pay a VA funding fee, particularly if they have a VA-approved disability.
If you have a single-close loan, you must pay the funding fee within 15 days of closing. For a two-time close loan, you must pay the funding fee within 15 days of the permanent closing.
Before you commit to building a home, itâs important to consider the cons of this type of construction loan.
Finding a lender offering a VA construction loan and VA purchase loan may require more time.
A few risks are inherent in construction loans, including following all requirements and area regulations. Thereâs also choosing a contractor that meets VA qualifications and getting the right qualifications for preapproval.
The construction draw process also presents challenges because every stage of the construction project must be considered. Monitoring progress and getting a final appraisal can also be time-consuming or present difficulties.
Once the home is built, it must pass the VA inspection, which could also present challenges.
Delays can occur when dealing with federal bureaucracy. You should plan for delays you might encounter, such as extra paperwork during the loan approval process, particularly with a VA construction project.
The VA retains oversight of the project during the construction phase, which can cause issues between the homeowner, the contractor and the VAâs representative.
Here are answers to some common questions about VA construction loans. Can I buy land with a VA loan?You can only buy land with a VA loan when itâs purchased at the same time as your new-home construction. You cannot buy land with a VA loan if you donât plan to build on it immediately.Can I buy a farm with a VA loan?You can only use a VA loan to purchase a farm if there is a home (or youâre building a house) on the land. To qualify, the property must be used as your
Due to restrictions and possibly limited access to these loans, you may find it challenging to build a home solely using a VA construction loan. However, if a new home is important to you, VA construction loans are available to you as a qualifying military member, veteran or eligible surviving spouse.
What Is A VA Construction Loan?
You can use a VA construction loan to buy, build and pay off a home. If you need a loan to buy land, this may require up to three loans.
The VA doesnât offer construction loans outright. Instead, it insures loans that approved private lenders make to qualified borrowers.
VA One-Time Close :: How To Get A Construction Loan With A VA Loan
FAQ
What is the minimum FICO score for a VA construction loan?
Can the VA loan be used to build a house?
Does USAA offer VA construction loans?
What is the debt to income ratio for a VA construction loan?
Does VA offer a construction loan?
The U.S. Department of Veterans Affairs (VA) offers its own construction loan to help eligible military members build their dream homes. While VA construction loans come with some perks (like no down payment requirements), they’re also subject to specific rules and regulations. Here’s what you need to know before applying.
What are the different types of VA construction loans?
There are two types of VA construction loans: the one-time close and the two-time close. As the name implies, the one-time close results in a single loan that covers construction costs and permanent financing.
Does Veterans United make VA construction loans?
Like many other lenders, Veterans United does not make VA construction loans to build new homes. An alternative to getting a VA construction loan is getting a construction loan from a builder or a local lender and then refinancing that into a permanent VA loan. This approach is something we help Veterans with every month.
How does a VA construction loan work?
With a true VA construction loan, Veterans close on the loan before the build begins. The lender then makes draws to a builder to cover the stages of new home construction. The VA requires a final inspection when the home is complete. The original appraiser typically conducts the final inspection whenever possible.
Are there alternatives to VA construction loans?
Alternatives to VA construction loans include traditional construction loans or government-backed loans, but they may have stricter requirements. If you’re an active or veteran member of the military and want to build a new home, you might be eligible for no-down payment financing backed by the U.S. Department of Veterans Affairs.
What is a VA construction to permanent loan?
In many cases, there are separate closings (and associated closing costs) for the VA construction financing and the permanent mortgage. It is also possible for the construction loan and permanent financing are handled with a single loan at closing before construction commences. This is called a one-time close or VA construction to permanent loan.