If you or your spouse’s military service qualifies you for benefits from the U.S. Department of Veterans Affairs (VA), you may be able to create a custom dream home using a VA construction loan. These loans allow eligible borrowers to buy land and build their primary residence on it.
VA construction mortgages are less common than traditional VA home loans and work a little differently. So if you’re thinking about this route to homeownership, read on for what you need to know before applying for one.
Key takeaways:
- The VA doesn’t offer construction loans (or any other mortgages) outright. Instead, it insures loans that private lenders approve for qualified borrowers: military service members, veterans and their spouses.
- You can purchase land with a VA construction loan to build your primary residence – but you have to commit to building within a strict time frame.
- There are many steps in the process of applying for a VA loan, getting approved and building your home – but at the end of the construction, you can transition directly into an affordable VA mortgage loan.
What Is A VA Construction Loan?
A VA construction loan is a short-term loan that allows eligible veterans and service members to finance both the purchase of land and the construction of a custom home, as long as the completed home will be their primary residence – consistent with standard VA loan requirements.
There are two types of VA construction loans: the one-time close and the two-time close.
- A one-time close loan combines the construction loan and the subsequent VA mortgage into a single transaction that requires only one closing. The lender establishes financing before construction even begins, and the terms of the loan will be settled for the mortgage’s full term by the end of the closing process.
- A two-time close involves two separate closings: one for the initial construction loan to buy the land and finance the build, and then another for the permanent mortgage. Buyers using a VA construction loan with a two-time close must transition into a permanent VA mortgage loan once the home is complete. Because they will have to close twice, this type can potentially take longer than a one-time close does.
As with any construction loan, once you begin to build, there are preset stages at which the lender disburses funds to the builder. These are known as “draws” – the funds are drawn, or distributed, to pay for materials and labor during the process of constructing the home. When the home is finished, you convert your VA construction loan into a standard VA mortgage, using whichever of the one-close or two-close loan options you selected at the start.
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Can You Buy Land With A VA Loan?
You can purchase land with a VA construction loan only if the loan also finances construction of a primary residence. The VA does not guarantee straight land loans, so you can’t use this loan to buy land and hold onto it for future use. It only guarantees loans to buy land under the condition that the borrower will be building their new primary residence on the property, and there are also restrictions on the types of land that can qualify for a VA loan.
If you are a VA-eligible borrower, there are two other possible scenarios for obtaining a VA construction loan. If you own land already, you can use it to build your home with a VA construction loan. If not, you could take out a separate loan to buy the land now, and then use a VA construction loan to build your home on it later, when you’re ready.
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How Does A VA Construction Loan Work?
This kind of loan requires careful planning and coordination with a VA-approved builder who is properly licensed and insured, and also familiar with the process. You’ll also need to work with a VA-approved lender that offers VA construction loans – and not every lender does.
Once you’ve settled on a lender and builder, you’ll need to provide your lender with a complete set of building plans, along with documentation detailing the materials to be used in construction.
A VA appraiser will then review the plans and the property to determine the home’s fair market value. This step ensures that both buyer and lender are confident that the loan amount doesn’t exceed the projected value of the finished home.
After the plan approval, the closing process typically takes 45 – 60 days. Once the loan is finalized, funds are placed into an escrow account and disbursed in stages – known as “draws” – based on project milestones. The lender must approve each draw before releasing funds to the builder, to ensure that the project is still on track and is meeting required standards.
Once construction is complete, the home must undergo a final compliance inspection and appraisal update to confirm it meets VA property requirements and is ready for occupancy. Then your VA construction loan will transition into a VA home loan.
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VA Construction Loan Fees And Closing Costs
When you take out a VA loan or construction loan, you’ll likely owe what’s called an up-front funding fee – this is a typical requirement that helps to support the overall program. In special cases, you may not have to pay it; for example, some borrowers may be exempt if they have a disability recognized by the VA.
If you do not qualify for an exemption, the VA funding fee is typically due at closing. Many borrowers choose to roll the funding fee into the loan amount rather than paying it out of pocket
On average, closing costs range from 3% – 6% of the home’s purchase price, though the exact amount will depend on factors like your location and loan type. Rolling these costs into your loan may be appealing in the moment, since you won’t have to pay the money out of pocket when you close. However, the trade-off is that you’ll likely pay more over time, because rolling your closing costs into your mortgage can result in higher monthly payments, and therefore more interest over the life of the loan.
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How To Get A VA Construction Loan
Let’s walk through the steps involved in getting this type of loan.
1. Qualify For The Loan
First, you must establish your eligibility by getting a Certificate of Eligibility (COE). The COE confirms you meet minimum service requirements, which depend on your branch, service time and status. Veterans with disabilities may be eligible for additional housing grants, financial waivers and tax benefits.
2. Find and Buy The Land (If Buying Separately)
Next, if you’re not waiting on the loan funds to do so, you can buy the land you plan to build your house on. Keep in mind that to qualify for a VA construction loan, the land you choose must meet local and national VA requirements. These can include:
- Year-round access to the home
- No natural hazards, including sinkholes, flood zones and environmental contamination
- Safe and potable water access and safe sewage disposal
- Proper drainage
3. Find A VA-Approved Lender
This might be the most challenging part of the process, as not all lenders that offer VA loans offer VA construction loans – so you may find it difficult to find one that provides both. You can contact your regional VA center to learn about the services provided in your state.
4. Get Mortgage Preapproval
Next you’ll apply for preapproval, which means you’ll submit your financial information and the lender will estimate how large a loan it expects you to qualify for. They’ll look at financial documents including pay stubs and bank statements, the COE, tax returns and investment account information. You’ll also undergo a hard credit check.
5. Find A Registered Contractor or Builder
Next, you’ll need to find a VA-registered contractor who’s willing to work under the VA oversight and payment terms. The builder must be registered with the VA and approved by the lender, and must be properly licensed, insured and experienced with VA construction requirements. Because the risk of a loan to purchase an existing home is compounded here by the risk inherent in home construction, strict requirements may be imposed on these builders. Explore the VA loan information hub to find registered builders, as well as answers to other VA loan questions you may have.
Note that you cannot perform the work yourself with this loan. If you move forward with a private loan and complete the work yourself, the VA may then authorize a traditional VA mortgage to pay off the construction loan – but only if the home meets its appraisal standards.
6. Meet Individual Credit Requirements
The VA itself doesn’t set credit requirements for VA loans – the private lenders that issue them each set their own requirements. When evaluating your application, lenders will consider:
- Credit score: The VA itself does not set a minimum credit score requirement. However, many lenders look for scores between 580 and 620 or higher, depending on their internal guidelines. You may be able to qualify with a lower credit score, depending on your situation and lender.
- Debt-to-income (DTI) ratio: Your DTI ratio is essentially how much of your gross monthly income goes toward debt payments. The maximum DTI ratio lenders will consider for a VA construction loan is generally around 41%, but some may have different criteria.
- Residual income: VA residual income refers to your income that’s left over after you pay all your major expenses. This figure helps your lender decide whether you have enough money after daily expenses to afford your new loan payments. Your particular VA residual income limit will depend on where you’re purchasing your property.
7. Provide Building Plans And Property Review
In addition to your financial requirements for eligibility, your building plans also must be approved for this loan. This entails submitting construction plans that you and your builder have prepared to your lender for an initial appraisal. These plans may include descriptions of the layouts and planned materials for the home. Both the land and the new construction must also meet property requirements, which are applied across all VA home loans before approval.
8. Close On The Loan
Upon approval, closing often takes 30 –60 days or longer, depending on builder approval, plan review and lender requirements.After you’ve closed, your lender will fund your construction project through draws, releasing money as needed for your builder to complete each phase of construction, with the rest remaining in an escrow account until needed.
9. Pass A VA Inspection
When your home is finished, the dwelling must pass a VA inspection. Once it does, if you have a one-time close loan, your construction loan will immediately become a permanent mortgage loan. A two-time close loan will require repayment of the construction loan and a VA permanent mortgage to buy the home, which is often done by refinancing the construction loan into a new mortgage.
If your home doesn’t pass inspection, you will have to address and resolve any outstanding concerns, as your loan cannot close without a final compliance inspection report.
Pros And Cons Of VA Construction Loans
If you want to build a custom home using a VA construction loan, it’s essential to understand the benefits and drawbacks.
| Pros | Cons |
|---|---|
| No or low down payment: You can obtain a VA construction loan with no down payment required – however, in most cases, you’ll have to pay a funding fee. | Finding an authorized lender: It may take time to find an authorized VA lender who can facilitate a VA construction loan. |
| Lenient credit requirements: VA loans are generally easier to get approved than many other kinds of construction loans, with a lower credit score requirement and a higher allowable debt level. Note, however, that each lender is free to set its own requirements. | Construction loan risks: A few risks are inherent in construction loans, including following all requirements and area regulations. You also have to choose a contractor or builder that meets VA qualifications before you can be approved for the loan. |
| Low interest rates: You may get a VA construction 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, to decide on the rate it offers you. | Stringent building requirements: The construction draw process can also present challenges, because every stage of the construction project must be monitored and approved, which can cause delays. In addition, the final construction has to get a signoff from a VA-approved appraiser and must pass the VA inspection, which could also present challenges. |
| Longer waiting periods: Unfortunately, delays often occur when building a home from the ground up, and a VA construction loan comes with its own unique set of challenges that could add more time to them, from extra paperwork to lagging draw approvals from the lender. It’s wise to build in some extra time to your expectations of how long the whole process will take. |
FAQ
The Bottom Line: A VA Construction Loan Lets You Buy Land And Build Your Dream Home – It Just Takes Time
A VA construction loan gives eligible veterans and active-duty service members (and their spouses) the unique opportunity to buy land and build a custom home – all with the benefits of VA financing, including no down payment and competitive interest rates.
While applying for a VA construction loan may take more time and effort, it offers you the freedom to build a home that fits your lifestyle (and budget) – and you can transition the loan directly into an affordable VA mortgage once the project is finished.
Maya Dollarhide
Maya Dollarhide is a freelance writer with over a decade of experience covering personal finance topics. Her writing credits include AARP, Bankrate, Investopedia, CNN.com, Yahoo Finance and Lending Tree. She enjoys writing articles and producing multimedia content that helps individuals and families make informed decisions about their money, from mortgages and home loans to reducing credit card debt and saving for retirement. She has also created educational materials for use in schools to teach young people about personal finance, from opening up a bank account to saving for college and beyond.
