Can you build a home with a VA construction loan?

Understanding VA construction loans

Active-duty and past military service members can utilize different VA home loans, one of which is a VA construction loan. In an effort to make home ownership easier on those who have served our country, VA construction loan borrowers may not need a down payment and are exempt from paying private mortgage insurance.

The VA construction loan is a short-term financing option for eligible military reservists, veterans, service members in the National Guard and eligible surviving spouses. If you fit the VA’s qualifications and are having a hard time finding an affordable home, it may be helpful to consider building a new home.

David Behymer, a loan originator at UMortgage, a mortgage broker based in Philadelphia, Pennsylvania, said that for the lender, the main difference in VA construction loans compared to conventional loans is that they’re working with a home builder instead of a seller. That builder “will need to provide us with their own set of documents to ensure their build plans and timelines work with the investors’ guidelines and more importantly, the VA’s guidelines,” Behymer explained.

With a traditional home loan, borrowers receive the full amount and then make monthly payments throughout the loan term. With a VA construction loan, your lender disperses the funds as needed, according to the projected building timeline, and portions of the loan remain in an escrow account until needed.

The VA has set up two basic construction loan types: a one-time close and a two-time close construction loan. If your lender agrees, you can conduct a one-time close, which essentially closes both the loan on construction and the permanent financing of the home purchase. The other option is a two-time close, in which the construction loan closes separately and then the borrower takes out a second loan to finance the long-term mortgage.

» MORE: How to choose a mortgage lender 2024

Steps to getting a VA construction loan

When you decide to pursue a VA construction loan, you’ll want to verify that you meet VA loan requirements. This is your first step in getting a VA construction loan, followed by various construction and loan arrangements.

Behymer noted that the main qualifications for VA construction loans “are very similar to utilizing your VA benefits on a traditional home purchase.” You’ll need to gather key documentation to prove your eligibility for a VA construction loan, as well as the typical financial documentation required of any home loan.

After meeting the criteria for a VA construction loan, reviewer Jose from Georgia said, “Being a first time home buyer/new construction homes, this process was easy as it can be. Of course the building of the house can be stressful. Veterans United makes sure to alleviate some of that stress and concerns that came along with it.”

Obtain Certificate of Eligibility (COE)

First, you must get a Certificate of Eligibility proving you’ve met the minimum requirements for days or years of service. You qualify if you currently have at least 90 days of active-duty service, and veterans qualify based on their time and length of service.

For example, veterans who served anytime after Aug. 2, 1990, must meet one of the following criteria:

• 24 continuous months of service
• The full period of at least 90 days to which you were called
• At least 90 days, if discharged because of reduction in force or hardship
• Less than 90 days, if discharged because of service-connected disability

VA loan qualifications vary somewhat based on earlier periods of service and for reservists and National Guard members, so check the VA website to confirm whether you’re eligible.

You can request a COE online or by mail, using your discharge papers or a statement from an approved commander or personnel officer. If you already have a lender, your lender may be able to obtain your COE using the Web LGY system, but ask to be sure. Otherwise, you can submit VA Form 26-1880 to request your COE.

» LEARN: How to get a VA Certificate of Eligibility

Find a VA lender and request preapproval

You’ll need to research VA lenders in your area. Not all lenders work on VA loans, and some may not be able to assist you with a VA construction loan. Talk to potential lenders about their requirements, fees and experience with VA construction loans.

Gather the documentation you’ll need, which, according to Behymer, includes:

• Certificate of Eligibility (COE)
• Income documents (paystubs, W-2s, tax returns)
• Asset documents (bank statements, retirement statements, gift documents)
• Personal identification documents

“Every loan can be a little different, so it’s best to speak with a qualified mortgage advisor to ensure you are providing correct documents for your specific file,” added Behymer.

As Behymer explained, you’ll need to meet the lender requirements, which, aside from the military service requirement, are similar to those of a traditional home purchase. “We review credit, debt-to-income ratio, assets and VA residual income to ensure you can qualify and pay back your new mortgage,” he said.

For VA loans, there’s no fixed minimum credit score, though the VA recommends buyers have at least a 620 credit score to qualify. A larger down payment may make it possible to secure a loan with lesser credit. Your debt-to-income ratio should be at 41 percent or less to be eligible for a VA construction loan.

Search for a VA-registered builder

This step isn’t necessarily as difficult as it seems. A list of VA-registered builders is available online. However, Behymer noted, “This should not discourage you from reaching out to whatever builder you choose.”

The VA also explains that a builder only needs to register with the VA to get their own VA Builder ID number, a process that is typically completed within five business days.

Develop construction plans and submit them to the lender

You’ll need to submit the building plans to your lender after your builder has developed them. Include essential information about the land and whether you’ve already purchased it or not. The deed to the land or the purchase agreement is required, and the builder should submit Form 26-1852 describing the materials and construction plans.

Subject proposed plans to VA appraisal

Although the home hasn’t been built yet, you’ll need a VA appraisal. The appraiser will examine your builder’s construction plans and base the results on how the plans are drawn up and whether they conform to homes in the same area. VA appraisal requirements are typically considered stricter than non-VA loan appraisal requirements.

Pay fees and close on the loan

Fees you’ll pay as the borrower include lender fees, closing costs on the VA construction loan and a VA funding fee. The funding fee is a cost passed on to VA beneficiaries — since VA loan borrowers don’t pay PMI or down payments, this offsets the cost to U.S. taxpayers.

You can roll the VA funding fee into the loan or pay in full upon closing. The amount depends on the loan amount and type of loan. For your first VA loan with less than 5% down payment, your funding fee is 2.15%. Putting more down results in a lower VA funding fee.

Some exemptions exist: You don’t have to pay the VA funding fee if you’re receiving disability compensation due to a service-connected disability, if you’ve received a proposed or memorandum rating or if you’ve received the Purple Heart.

Construction and VA inspection

Your builder will conduct the project using the funds from the VA construction loan. The builder receives distributions from the loan at certain points during the building process, with some of the funds remaining in escrow until needed.

Once the project is complete, the building must pass VA inspection. This means the new construction has to pass local building guidelines as well as VA minimum property requirements, or MPRs.

Pay off loan or convert into a permanent VA loan

This step depends on the type of loan you’ve agreed on with your lender. You may choose construction-to-permanent financing within a one-time close loan. In this case, your loan automatically converts to a permanent mortgage, without you having to deal with closing costs and other factors all over again.

A two-time construction loan as it sounds: there’s one loan for the construction project, and after the home has been built, you take out a second permanent VA mortgage on the home. You must go through the loan underwriting process twice, plus pay closing costs a second time.

» MORE: Compare current VA home loan rates (2024)

Pros and cons of VA construction loans

Viewing the VA construction loan as a benefit to those who have served doesn’t mean you should blindly jump into this commitment without considering the pros and the cons.

Somewhat less stringent credit requirements and the savings of no down payment are major pros of VA construction loans. However, other VA loan requirements could slow you down as well.

Pros of VA construction loans:

• No private mortgage insurance
• VA doesn’t require a down payment
• Interest rates may be lower than with other loans
• No penalty fee for early payoff
• Build your own home instead of waiting for one to come on the market
• Can use one loan to purchase land and build the home
• No payments due during construction
• VA loans are a lifetime benefit you can use multiple times

Be aware that although there isn’t a VA-imposed down payment, in some cases you’ll have to put money down, such as if your purchase price exceeds the appraised value.

Cons of VA construction loans:

• Must have VA-approved builder and lender
• Not all builders and lenders offer VA construction loans
• May be required to pay VA funding fee
• Longer time frame to complete

Behymer explained, “As with any construction loan, the time frame to document and build the home can be more time-consuming than a traditional purchase.” However, you could find the chance to build your own home outweighs any inconvenience in the loan process.

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Using a VA construction loan to renovate an existing house

Technically, you cannot use a VA construction loan to renovate an existing home. “This would not fall under the VA construction/one-time close construction loan types,” Behymer explained.

The VA construction loan is strictly for building a new single-family home. However, Behymer noted, “There is a separate VA Renovation loan, which works similarly to a FHA 203(k) loan or FannieMae HomeStyle Renovation Loan (for conventional purchases).”

If you meet the qualifications for a VA construction loan but are considering buying a fixer-upper instead, you may qualify for a VA Rehab loan or renovation loan. You still take advantage of the exclusive VA benefits, but it’s a distinct category of VA loans if you’re renovating the home after purchase.

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Bottom line

VA construction loans enable military service members and veterans and their surviving spouses to build a home from the ground up. These loans, though complex in terms of paperwork, are easier to qualify for in other ways, such as minimum credit requirements.

If your period of military service meets the VA’s criteria, you can save money with no down payment or mortgage insurance premiums. Though the process can be lengthy and require more documentation than a conventional mortgage, it can be worth it to be able to build the home you desire.