How a VA Construction Loan Can Help You Build Your Home
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Summary:
VA construction loans cater to veterans and active-duty military members looking to build their own homes. Not only does this loan program offer competitive interest rates, but it also provides flexibility in the construction process. Plus, VA loans often require little to no down payment, making it easier for veterans and military families to achieve their homeownership dreams.
Do you want to build your dream abode from the ground up but don’t know where to get the funds to make it a reality? If you’re a veteran or active-duty service member, you may want to consider VA construction loans.
A VA construction loan is a temporary financing option — guaranteed by the United States Department of Veterans Affairs (VA) — that helps borrowers fund the cost of building a home. Instead of offering one lump sum payment to purchase a property, VA construction loans distribute payments that come in installments as your construction project completes new stages of development.
Let’s dive deeper into how a VA construction loan works, the eligibility requirements, and how it could help you build your dream home.
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How a VA construction loan can help you build your home
A VA construction loan can help you build your dream abode from scratch by providing you with the financing you need for the construction project. VA construction loans differ from traditional mortgages in that they’re specifically designed for building a new property. With the funds, you can pay for the land, materials, labor, and other expenses associated with the construction process.
VA construction loan requirements
If you’re interested in taking out a VA construction loan, here are the specific requirements you need to meet to be eligible:
Borrower requirements
- You must be an eligible active-duty service member, veteran, qualified reservist, or National Guard personnel (or an eligible surviving spouse).
- You must have a credit score of at least 620.
- You must not have filed for bankruptcy in the last two years.
- You must have a stable source of income and employment.
- You must have a debt-to-income ratio of 41% or below.
- You must meet income requirements based on your family size (you may need to provide your recent pay stubs, tax returns, W-2s, and bank statements from the past two years to verify your income).
Property requirements
- The finished home must be your primary residence.
- Your total VA construction loan amount must not exceed $726,200 for most U.S. counties in 2023.
- The property must be inspected by a VA-approved professional.
- Eligible property types include single-family homes, condominium units, and manufactured homes, though this requirement may vary depending on the lender.
Lender/contractor requirements
- The lender must be a VA-approved lender participating in the VA construction loan program.
- Your chosen contractor must be properly licensed and approved by the VA.
- You must receive a new construction warranty from the VA-approved builder.
How to apply for a VA construction loan
While there’s typically quite a bit of paperwork involved in securing a VA construction loan, it’s still worth considering if you’re an active-duty service member or veteran and want to avoid paying a hefty down payment. Here’s a step-by-step guide on how to get a VA construction loan:
1. Get a certificate of eligibility (COE)
Before you apply for a VA construction loan, you must obtain a certificate of eligibility (COE) from the Department of Veterans Affairs (VA). You can file for this certificate online or submit VA Form 26-1880 to your local VA office. This certificate proves that you’re eligible for the VA loan program.
2. Get preapproved for a loan
After submitting your certificate of eligibility, start shopping for a lender who offers VA construction loans and get pre-approved. This process involves providing your VA construction loan lender with your financial information, such as your credit score and income. Getting pre-approved is helpful since it gives you a better idea of the type of home you can afford to build.
3. Find a VA-registered builder
Once you’re pre-approved for a VA construction loan, search for builders who are registered with the VA and have a VA Builder ID number.
4. Submit the building plan and get the home appraised
After finding a VA-registered builder, the next step is to submit your construction plans to the lender, such as the blueprint and the materials needed. You also need to get an appraisal from a VA-approved appraiser to determine the value of the home you’d like to build.
5. Close on the VA construction loan
Once your lender approves the building plan, it’s time to close on the VA construction loan and finalize your payment terms. This process can take anywhere from 45 to 60 days. Once you’ve closed on the loan, your funds will be disbursed based on the timeline of your home construction project.
For example, at closing, you might receive a portion of the total loan amount needed to complete the lot purchase and pay your builder an advanced deposit. The remainder is then deposited into an escrow account from which you can withdraw funds as needed.
6. Pass the final VA inspection
Once you’ve built your dream home, you’ll have to pass a VA inspection to ensure the property meets the government agency’s minimum property requirements.
Pro Tip
If you need help finding VA-registered builders, the VA maintains a list of approved home builders on its website.
Pros and cons of VA construction loans
If you’re on the fence about taking out a VA construction loan, consider the following VA loan benefits and disadvantages to help you make an informed decision:
Pros
- You may not need to come up with a down payment for a VA construction loan.
- You can get the funding fee waived if you currently receive VA compensation for a service-connected disability.
- You don’t need private mortgage insurance (PMI), even with no money down.
- You can roll your closing costs into the loan.
- Credit and income requirements for a VA loan are relatively lenient.
Cons
- Both your lender and builder must be VA-approved.
- Closing costs may be higher on a VA construction loan than with other types of loans due to additional expenses, such as the funding fee.
- Construction loan rates may be higher than interest rates on conventional home loans.
- Not all VA lenders offer VA construction loans.
Types of VA construction loans
There are two types of VA construction loans: the construction-to-permanent VA loan and the construction-only VA loan.
Construction-to-permanent VA loan
Also known as the one-time or single-close loan, this type of VA construction loan both funds the construction of a new property and is automatically converted into a traditional mortgage once the construction is completed. With a construction-to-permanent loan, you’ll only need to go through one closing, eliminating the need for a second mortgage and saving time and money on closing costs.
Construction-only VA loan
Also referred to as the two-time close loan, this type of VA construction loan has two separate closings. First, you’ll obtain a construction loan to fund the building process. Once the construction phase is over, you’ll need to go through a second closing and obtain a traditional mortgage to repay it.
What to know before applying for a VA construction loan
Building a home involves various costs, including land acquisition, architectural plans, permits, materials, labor, and unforeseen expenses. For this reason, Jeff Johnson, a real estate agent and owner of Simple Homebuyers, says it’s important to “carefully budget and plan for these costs when applying for a VA construction loan. Consult with builders, contractors, and construction professionals to help estimate costs so you can avoid surprises during the construction process.”
According to Johnson, you should also be aware that “construction loans typically have a short-term repayment period and may require refinancing into a permanent mortgage once construction is complete.”
FAQ
What kind of house can I build with a VA construction loan?
Each lender has specific restrictions for the type of house you can build with a VA construction loan. For example, most lenders won’t approve financing for the construction of mobile homes, although some may be open to modular or manufactured homes. Before submitting a loan application, talk to your lender or loan officer for more details on the type of house you can build with a VA construction loan.
How are interest rates set with VA construction loans?
The Department of Veterans Affairs does not regulate rates for VA construction loans. Instead, the interest rate you receive is determined by the lender based on factors such as your credit score, your debt-to-income ratio, and your lending history. The more creditworthy you are, the better the terms you’re likely to receive.
What are the benefits of a VA construction loan?
Getting a VA construction loan comes with multiple benefits, including the possibility of not having to come up with a down payment, lower closing costs than regular loans, no mortgage insurance requirements, and better terms and interest rates than other construction loans.
That said, VA construction loans are only available to eligible active-duty service members, veterans, National Guard personnel, qualified reservists, and eligible surviving spouses. If you satisfy this condition, you must also meet several other requirements to be eligible for a VA construction loan, such as having a credit score of at least 620 and a DTI ratio of 41% or less.
Can I use a VA construction loan to build a modular or manufactured home?
That depends on the lender. VA construction loan lenders typically won’t allow you to use the funds for building a mobile home. However, financing a modular or manufactured home with a VA loan may be possible if the home meets certain property requirements.
For example, to be VA-eligible, a manufactured home cannot be moved and must be affixed to a permanent foundation. Otherwise, lenders may consider your manufactured home a mobile home and reject your VA construction loan application.
How do I apply for a VA construction loan?
First, you’ll need to meet the eligibility requirements, such as having a Certificate of Eligibility, obtaining a construction contract, and getting approved for a VA appraisal. You can then apply for a VA construction loan through a lender. Be sure to find a lender who is experienced with VA loans and understands the VA construction loan process.
What’s the difference between a VA construction loan and a conventional construction loan?
The key difference between a VA construction loan and a conventional construction loan is that a VA loan tends to have more relaxed credit score and DTI ratio requirements. Conventional construction loans also typically require a down payment, whereas VA construction loans do not. So if you’re a veteran, an active-duty service member, or an eligible surviving spouse, you may have an easier time qualifying for a VA construction loan than a traditional construction loan.
Key Takeaways
- Unlike a traditional home loan, a VA construction loan provides financing for building a new property.
- You may be eligible for a VA construction loan if you’re an active-duty service member, a veteran, National Guard personnel, a qualified reservist, or an eligible surviving spouse.
- There are two types of VA construction loans: construction-to-permanent (which converts to a mortgage after construction on the home is complete) and construction-only (after which you’ll need to take out a traditional mortgage to pay off the home).
- The VA construction loan process involves obtaining a certificate of eligibility (COE), getting pre-approved for a loan, finding a VA-registered builder, submitting building plans, getting the home appraised, closing on the loan, and passing a VA inspection.
Even if you’re not eligible for a VA construction loan, there are many other financing options available — such as FHA construction loans — to help you build your dream abode from the ground up. Remember, you’ll want to take the time to compare multiple lenders to ensure you’re getting the best deal possible.
Ready to start searching for the best ways to finance your construction project? Head on over to SuperMoney’s home loan comparison page for an extensive list of lenders and rates with real user reviews!
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