Millions of veterans and active-duty service members have bought homes through the Department of Veterans Affairs. That’s one of the perks of the job.
What many may not realize is they not only can buy an existing house, they can buy some land and build one with a VA home construction loan.
Finding a lender that offers construction loans can be a little tricky, however. Here’s a guide on what to expect if you decide to build a new house with a VA loan.
What Is a VA Construction Loan?
Most VA loans are lump-sum payments to buy existing homes. They are long-term loans, and the terms don’t change unless you refinance.
Construction loans are typically short-term and pay for the costs of building a new home, though that’s not always the case. There are various types of VA loans to choose from.
The first can cover land acquisition costs. The next would cover construction costs. Then there’s a permanent loan that pays off the first two and becomes a long-term mortgage. These are often combined into a single loan, which eliminates a lot of paperwork.
Who Is Eligible for a VA Construction Loan?
To qualify for a VA loan, you have to be an active member of the military or a veteran. There are further requirements for a construction loan:
- The home must be built by a VA-approved builder.
- You and the builder must submit a complete set of plans.
- Those plans must be appraised.
VA Loan New Construction Requirements
Active-duty personnel are eligible for a construction loan after 90 days of continuous service. Veterans who joined the military after 1990 can qualify by meeting any of the following requirements:
- At least 24 months of continuous service.
- Your full period on active duty was at least 90 days.
- You served fewer than 90 days but were discharged for a service-connected disability.
If you served prior to 1990, the requirements vary and are listed on the VA’s eligibility page.
How to Build a Home with a VA Construction Loan
Getting a loan to build or buy a house is not a simple process regardless of the lender. But a VA construction loan has a few extra steps.
1. Get a Certificate of Eligibility (COE)
This proves you meet the service requirements and have earned the benefits. You can apply for a COE through the VA eBenefits online portal or work with your lender to acquire one.
If you’re on active duty, you will need a statement of service signed by your personnel office. Veterans will need to show their DD214 discharge papers
2. Find a Lender and Get Pre-Approved
This is where things could get tricky, since not all VA mortgage lenders offer construction loans. If you find one that does, you’ll need to produce the following documents:
- Your driver’s license or other photo identification
- Your COE
- Pay stubs
- Federal tax returns for the past two years
- Bank statements
- Statements from other investment or retirement accounts
- If you already own the land, you’ll need to show the deed, survey and settlement statement.
- If you don’t own the land, you’ll need to show the purchase agreement
- Construction contract with the builder
3. Find a VA-Registered Builder
There are plenty of builders out there, but not all meet VA requirements for a loan. A list of approved builders is available at the Veterans Information portal. Price estimates for construction projects can vary by tens of thousands of dollars, so try to discuss your plans with at least three builders.
4. Get a VA Appraisal
Hire an appraiser to evaluate the project and what it should cost. You don’t want your home to be worth a lot more than surrounding ones, since that could lower the overall appraised value. It also might make the process easier if you hire an appraiser who has handled VA loans.
5. Close the Loan
Once your appraisal is done and plans are approved, you sign all the necessary papers to get things rolling. That takes one visit to the lending office or website, but the closing process can take 45 to 60 days.
Unlike a typical mortgage, there is no lump-sum payment. Funds are put in an escrow account and disbursed on the construction timeline.
6. Final Inspection
When construction is complete, you’ll need a final inspection by an appraiser to certify the house was built according to plans and meets all guidelines. Then the loan will then be modified into a permanent VA loan.
Pros and Cons of a VA Construction Loan
The benefits of a VA loan compared to loans available to civilians make it a very attractive option, but there are added requirements you’ll want to consider.
- Better terms and lower interest rates
- Relaxed qualification requirements
- No mortgage insurance requirements
- No down payment
- No construction loan limits
- Lower closing costs
- It can be a bigger hassle finding a builder and a lender that work with the VA
- Some builders don’t take VA loans
- More paperwork
Permanent VA Financing for Construction Loans
Turning your short-term construction loan into a long-term mortgage is relatively simple. It all depends on which approach you and your lender choose.
A VA Cash-Out refinance loan requires more paperwork than a VA purchase loan, though those guidelines vary by lender.
Alternatives to a VA Construction Loan
Unless you have the cash to finance construction, there’s pretty much one alternative if you can’t get a VA construction loan: Find a lender that will give you a conventional construction loan.
The process is similar to acquiring a VA loan, but it doesn’t have the pros we’ve listed above. The good news is you might be able to refinance it into a conventional VA loan and then roll it into a long-term mortgage.
FAQs About VA Construction Loans
Working through all the details of a loan can get pretty complicated. Here are answers to some of the more common questions.
What kind of house can I build with a VA construction loan?
Manufactured homes and mobile homes aren’t likely to be approved. Neither are vacation homes or any dwelling that won’t be your primary residence.
But you have a fair amount of leeway on your house design. Lenders will have specific requirements on the type of houses they’ll loan you money to build, so you’ll need to consult with them for details.
How are interest rates set with VA construction loans?
Though a VA loan might offer a lower monthly payment, the Department of Veterans Affairs does not regulate interest rates. Those are set by the Federal Reserve, and the rate you get will depend primarily on your credit score, just like any other loan.
When do mortgage payments begin with a VA construction loan?
You’ll be required to start repaying the loan as soon as construction is completed. The thought of paying off such a big bill can be a bit daunting, but at least you’ll be doing it in a new home.
About The Author
Tom Jackson focuses on writing about debt solutions for consumers struggling to make ends meet. His background includes time as a columnist for newspapers in Washington D.C., Tampa and Sacramento, Calif., where he reported and commented on everything from city and state budgets to the marketing of local businesses and how the business of professional sports impacts a city. Along the way, he has racked up state and national awards for writing, editing and design. Tom’s blogging on the 2016 election won a pair of top honors from the Florida Press Club. A University of Florida alumnus, St. Louis Cardinals fan and eager-if-haphazard golfer, Tom splits time between Tampa and Cashiers, N.C., with his wife of 40 years, college-age son, and Spencer, a yappy Shetland sheepdog.
- N.A. (ND). VA Home Loans. Retrieved from: https://www.benefits.va.gov/homeloans/index.asp
- Ostrowski, J. (2023, January 25). The 10 largest VA mortgage lenders. Retrieved from: https://finance.yahoo.com/news/10-largest-va-mortgage-lenders-153216881.html
- Carter, T. (2023, February 22). Ask the Builder: Don’t just hope your contractor does the right job. Inform yourself beforehand. Retrieved from: https://www.spokesman.com/stories/2023/feb/22/ask-the-builder-dont-just-hope-your-contractor-doe/