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What Is a VA Construction Loan?
By Aja McClanahan MONEY RESEARCH COLLECTIVE
VA loans are guaranteed by the U.S. Veterans Administration and can help eligible borrowers become homeowners with more favorable terms than conventional financing. But if you think of VA loans only as an option for purchase of an existing home, you might be surprised to learn that VA construction loans are available to help you build a brand-new home.
Getting a VA construction loan has a lot of moving parts because you’re required to use a VA-approved lender and builder and to ensure that the construction meets VA guidelines. However, because this loan allows you to build a home with no down payment, it could be well worth it for those who qualify. Here’s more information about this loan to help you determine if it’s right for you.
Advantages of VA construction loan
Can you use a VA loan to build a house?
How does a VA construction loan work?
How do I get a VA construction loan?
How to find a lender for a VA construction loan?
VA construction loan FAQs
Summary of our guide to VA construction loan
Advantages of a VA construction loan
There are many advantages to using a VA loan to build a new home. Not only can you get a custom home to suit your taste, but you may also get better terms than you would with other types of loans. Here are some benefits of VA loans that you should know about.
No down payment
Generally speaking, VA loan requirements don’t include a down payment. Home purchases and VA loan refinances are 100% loan-to-value (LTV), meaning that no down payment is required. And when you use a VA loan to build a new home, there’s no down payment required on those transactions either.
Not having to come up with a down payment can help people reserve cash for other purposes, such as furnishing their new home, building cash reserves or making additional home improvements.
But VA loans do require the payment of a funding fee. This funding fee helps reduce risks associated with these no-down-payment home loans. The amount of the fee depends on how much you put down and how many times you’ve used your VA loan benefit. Most lenders allow borrowers to roll this fee into the loan, so there’s no need to pay out-of-pocket for it.
No mortgage insurance is required
Another neat feature of a VA construction loan is that it doesn’t require mortgage insurance. Typically, loans with more than an 80% LTV (or less than a 20% downpayment) require private mortgage insurance (PMI), which can add a lot to your loan’s monthly payment. VA loans don’t require borrowers to pay for PMI, and you can skip this expense with a VA construction loan as well.
Easier qualifying guidelines
In comparison to most conventional home loans, VA construction loans have looser approval requirements. There’s no minimum credit score needed to qualify, and lenders are encouraged to consider a broad range of financial factors when they evaluate loan applications. Some lenders may relax their standards on debt-to-income (DTI) requirements. Conventional lending guidelines don’t allow borrowers to exceed a DTI of 41% – 43%, whereas a VA construction loan could allow a DTI of 50% or, in some cases, more.
VA loans also allow lenders to look at a borrower’s residual income, or what’s left after paying all expenses. Other compensating factors may include additional income, assets, and cash reserves.
Seller concessions
VA construction loans also permit the seller or builder to add incentives to the transaction to sweeten the deal. These concessions are defined as “anything of value added to the transaction by the builder or seller for which the buyer pays nothing additional and which the seller is not customarily expected or required to pay or provide.”
Sellers and builders can offer up to 4% of the purchase price in concessions. Seller concessions could cover expenses normally paid for by the buyer, including:
- Payment of the buyer’s VA funding fee
- Prepayment of the buyer’s property taxes and insurance
- Payment of extra points to provide permanent interest rate buydowns
- Appliances such as a television or microwave
- Provision of escrowed funds for temporary interest rate buydowns
- Payment of credit balances or judgments on behalf of the buyer
Can you use a VA loan to build a house?
Yes, you can use a VA loan to build a house. Although the term “VA construction loans” might imply that they can be used to purchase a property and renovate it with loan funds, this is not the case. VA construction loans are for new construction projects only.
How does a VA construction loan work?
Contrary to what some people think, the Veterans Administration does not underwrite or lend to borrowers. They only provide underwriting guidelines to approved lenders, who must use those guidelines to qualify and lend to buyers. They also guarantee 25% of the loan value, which makes VA loans less of a risk to lenders than ordinary mortgages.
VA construction loans differ from typical construction loans because they offer the option to roll three loans into one. Instead of having separate loans for the land, home construction, and a long-term mortgage, you’ll take out only one loan and use it for all three phases of the process.
To get a VA construction loan, you’ll have to find an approved VA lender and builder. In some cases, the builder may have a licensed lending arm that can process your loan. Once you have a lender and a builder in place, you’ll start the application process, which will require you to fill out a loan application form, submit building plans, get an appraisal, and pass a final inspection. We’ll talk more about these steps in detail below.
How do I get a VA construction loan?
VA construction loans require borrowers to take multiple steps and can take a while to close. The more you know about the process, the better. Here’s a general outline of the process of getting a VA construction loan.
Obtain a Certificate of Eligibility (COE)
A COE issued by the Veterans Administration lets your lender know you’re eligible for a VA construction loan. You may be able to get this document directly from your lender. You can also get it by logging into your eBenefits portal. Another option is to complete a form on the VA website and mail it in, though this will take much longer than the other methods mentioned.
Find a VA construction loan
You will need to find an approved lender that offers VA construction loans. Because there aren’t very many lenders who underwrite these loans, be very specific with your inquiry so lenders understand that you need a loan to finance new home construction. Finding a VA construction loan lender can be more difficult than finding other types of lenders; we’ll discuss some different ways to find them below.
Get preapproved
Once you find a lender, you’ll need to start the loan application. The bank or finance company will look at your financial profile and determine whether you meet the lending criteria that’s set forth by the VA. You’ll also have to satisfy additional criteria imposed by the lender itself. If you meet both sets of criteria, you’ll get a preapproval letter you can share with your builder.
Find a VA-approved builder
The VA doesn’t license or certify home builders, but builders must register with the VA before working with a homebuyer who’s using a VA construction loan. Once you find a builder familiar with VA requirements for new construction, they’ll get to work on the plans. A VA home appraiser will evaluate those plans to determine the home’s value and final loan amount.
Construction
After the appraisal, you’ll close on your VA construction loan. Loan funds will be held in escrow during construction. As your builder completes each phase of construction, he or she will receive payments (or draws) from the funds held in escrow.
Final inspection
Once construction is complete, there will be a final inspection. Once the property passes that inspection, your builder will receive the remainder of the money due. You’ll also get a certificate of compliance or occupancy authorizing you to occupy the home. Typically this event will mark the date when you must begin making payments on your home loan.
How to find a lender for a VA construction loan
Unfortunately, there aren’t many lenders that offer VA construction loans. What’s more, lenders that once offered this product are scaling back on them due to the risks involved. But while it may take a little more work than it used to, you should still be able to find a suitable lender to finance the construction of your new home.
You might begin your search for a VA-approved lender online. Check with your regional VA loan center if you don’t get any leads that way. Their loan specialists may be able to help you find a VA loan lender that offers VA construction loans.
Another option is to connect with new home builders directly. They may refer you to lenders or have an affiliated loan company that offers VA construction loans. For instance, D.R. Horton is a popular home builder with a lending arm that offers VA construction loans.
Finally, you can work with an experienced mortgage broker to find a lender who can underwrite your VA construction loan. Mortgage brokers typically have access to multiple lenders and loan types so that you’ll have a better chance of getting the loan you need.
VA construction loan FAQs
How can I use a VA loan for new construction?
You can use a VA loan construction home to build a new home, as long as you and your building project meet the eligibility guidelines. Once you close on your loan, the funds will be paid to the builder in stages as the project progresses.
What is the approval process for a VA construction loan?
First, you'll have to verify that you're an eligible borrower by obtaining a COE and submitting a loan application. Second, you'll need to work with a VA-approved builder and lender. Third, you'll need an appraisal to confirm your loan amount. Finally, the bank will start to release funds to your builder to complete the construction of your new home.
How long does it take to get a VA construction loan?
VA construction loans will take longer to close than conventional home loans. It could take up to 60 days or more to close on a VA construction loan.
Who can qualify for a VA construction loan?
Qualifying for a VA loan includes having a specific financial profile as set forth by the VA and your lender. You'll also have to meet service requirements. Here's who qualifies for VA construction loans, according to the VA website:
- Veterans who meet service length requirements
- Service members on active duty who have served a minimum period
- Certain reservists and National Guard members
- Certain surviving spouses of deceased veterans
Summary of our guide to VA construction loan
VA loans have many benefits that can decrease the cost of borrowing for a home, but they add some additional steps to the home-buying process. A VA construction loan extends those same benefits to those looking to build a brand-new home.
Although numerous benefits come with VA construction loans, you should be prepared to go through more steps to qualify for and build your home. If you don’t mind spending some extra time to get your dream home with the least amount of money down possible, it’s an avenue well worth exploring. If you want more information on VA loans in general, take a moment to check out our VA loan home loan guide.
Aja McClanahan is a writer that covers personal finance and a number of related topics. Her work and personal story of paying down over $120,000 in debt have been featured in publications around the web including sites like Money, CreditCards.com, Business Insider, Inc., Experian and many others.