All branches of military service attract go-getters and build confidence, so it follows that servicemembers might not want to buy a home ready-made. Some would rather plan and orchestrate the building of their home from scratch. The Department of Veteran Affairs guarantees a loan for that.
VA construction loans involve much more paperwork than VA purchase loans, but the goal of both programs is the same: to reward military service with a pathway to homeownership on the best terms out there.
Let's explore the fundamentals of a VA construction loan. In this article we'll cover the following points and more.
- Who qualifies for a VA construction loan?
- 6 steps of a VA construction loan
- Common questions about VA construction loans
- Advice to make the process easier
VA Construction Loan Defined
VA construction loans allow veterans to borrow money for building, repairing, or adapting the home where they will primarily live. As with other VA loans, the money doesn't come from the VA itself but rather from VA-approved lenders.
A VA construction loan can take one of two forms. Either the loan solely covers the construction stage and a separate purchase loan takes over from there, or the loan is an all-in-one product, transitioning from construction to permanent mortgage. These two forms are also known as two-time closing and one-time closing.
The benefit of the construction-only VA loan is that it's well supported by more lenders. A downside is that you'd have to pay closing costs on this loan as well as the purchase loan that comes after it, since they are separate.
In contrast, a construction-to-permanent VA loan has one closing and, as you would expect, less complexity. You transition from the construction phase to settled home ownership under the same loan.
Two great benefits.
A VA construction loan offers two of the same major benefits of a more common VA purchase loan. First, no down payment is required (but money down could lower your interest rate). Second, you won't have to carry private mortgage insurance (PMI) even if you choose to put no money down, a money-saver that nonveterans can only dream about.
Eligibility for a VA Construction Loan
Who qualifies for a VA construction loan? Eligibility is the same as a regular VA home loan. Therefore, to qualify for this loan you must be a current or veteran servicemember, a qualifying member of the National Guard, an eligible reservist, or a qualifying surviving spouse.
Lenders don't screen for veteran eligibility themselves. Instead, they rely on the VA's standards as laid out in the Certificate of Eligibility (COE). This certificate is how you prove to lenders that you qualify for a VA-backed loan.
Requirements specific to a VA construction loan.
A few strict requirements make a VA construction loan more complicated than an ordinary home purchase loan.
- You must use a VA-approved builder. The VA says the program "does not allow for owner/builders."
- You and your builder must submit complete plans for the home when applying. Afterward, the builder will need to fill out forms about the materials used and the site of the future home.
- The plans must be appraised. "Make sure you are building a home that is common in size and design for the area," says the VA, or else it won't be appraised highly enough to qualify for a zero down payment.
The 6 Steps of a VA New Construction Loan
Although the process of securing and carrying out a VA construction loan is complicated, veterans manage it all the time. How does it work? We've boiled the process down to six steps.
1. Get a COE
The Certificate of Eligibility mentioned earlier is how you prove to lenders that you're eligible for a VA construction loan. In general, you’re eligible if you've served at least 90 days of active military service or completed six years of honorable service.
2. Get preapproved for the loan.
We frequently advise homebuyers to get preapproval from their lender of choice because it focuses their house hunt on properties within budget and shows sellers that they're serious, not just window shopping. For VA new construction loans, preapproval serves as an important reality check before the first blueprints are drawn—you don't want to plan a house you can't afford.
3. Hire a qualified builder.
You should choose a licensed and insured builder for a start. If the builder is not yet approved by the VA, he or she can get approved in order to undertake your project. To review the history of a VA-approved builder, you can use this lookup tool. You and the builder must submit complete specs for the home when applying for the loan.
4. Get the plans appraised.
VA home appraisals are more stringent than the civilian variety for good reason: Veterans deserve to live in well-made homes with solid value that enhance the area. That's why a VA home appraiser will peruse your plans as carefully as an existing structure. Try to hire an appraiser with VA construction loan experience.
5. Close on the VA construction loan.
With your plans approved and appraised, you're ready to close on the VA construction loan. Under the VA program, the builder must pay all closing costs at this point, though builders can pass them along to borrowers. This is one way builders assume greater responsibility with a VA construction loan. Closing can take 45-60 days, estimates the Department of Veteran Affairs.
6. Time for the official VA inspection.
Months have gone by, but now your new home is built! The final step is to have it officially inspected under the guidelines of the VA (the list of what they check is two pages long). When you pass this step, you know you're living in a quality home.
Now, if your VA construction loan is the construction-to-permanent kind (worth seeking out because they are getting easier to find), it transitions to a VA mortgage. Otherwise you'll need a separate VA purchase loan with its additional closing costs.
Questions People Have About VA Construction Loans
Some details can slip through the cracks, and some information is worth repeating. Here we address most of the FAQs people have about VA construction loans.
So they'll loan me money to build my dream home?
Sort of. You'll need to hire a VA-approved builder, not do it yourself. And your dream home can't be outlandish. If you overbuild for the area or include amenities the average buyer might not like, the property appraisal (based on the plans you submitted when applying for the loan) could come in low, jeopardizing your chances of approval or at least of moving ahead with zero down payment. Also, individual lenders will have requirements about the kind of home they will loan money to build.
How can I get the lowest interest rate on a VA construction loan?
VA loan interest rates are set by lenders, not the Department of Veterans Affairs. The same financial strengths that help you get a lower interest rate from lenders will help you with a VA construction loan too: credit score, payment history, and your debt-to-income ratio..
An interest rate will be set for the construction phase, and many lenders let veterans make interest-only repayments during construction. Then, after the home is built, another interest rate will be determined for the mortgage.
How can I avoid paying for two closings?
Look for a construction-to-permanent VA home loan. This is an all-in-one loan product that used to be difficult to find, but it has been growing in availability since 2015 per the VA News blog. This type of VA construction loan becomes your permanent mortgage, no second closing required. This kind of loan is sometimes referred to as one-time close, or OTC.
Can I use a VA construction loan to repair my house?
Yes, a VA construction loan can be used to repair or adapt a home. Plus: Thanks to revised guidelines passed by congress and signed by President Biden, veterans who take out a construction loan to repair their home after a declared major disaster are eligible to pay the first-time-use funding fee instead of the higher subsequent-use fee.
Anything I can do to make the process easier?
"Get a conventional construction loan and when complete, refi into a VA loan. Much easier this way," is the advice of Reddit user SeabeeBuilderChief. This approach will require a down payment because the construction loan is not VA-backed. Too big a down payment will rule out this option for many people. Reddit user DRealLeal says, "I wanted to do it for $300,00 and they wanted $100K down."
Work With the Right Lender
Partnering with the right lender is more important with a VA construction loan than a VA purchase loan, especially if you want only one closing, a money-saving feature that not all lenders offer. "FHA and VA construction loans are in the deep end of the mortgage pool," says the VA News blog. "Make sure you are working with a loan officer that understands the program."
Lendgo doesn't search for VA construction lenders specifically, but we can connect you with a short list of quality lenders who would make a great starting point. Ask them if they have experience with VA construction loans.
Finding a construction-to-permanent VA loan used to be difficult, but some say the quest is getting easier. The VA News blog noted availability growing in recent years. To save both time and money, make it a goal to find a VA-approved lender with a one-close product so you only pay closing costs once.
VA Construction Loan Key Takeaways
- A VA construction loan helps veterans build their ideal house for zero down.
- VA construction loans are not available from most lenders, so finding one could take time.
- A VA construction loan can either cover the construction phase only, or transform into a mortgage once the home is built. The advantage of the latter is you pay only one closing.
- Plans and specs must be submitted by you and your VA-registered builder when you apply for a VA construction loan.