VA Construction Loans: Financing Options for Building Your Dream Home

Service members or veterans considering building a dream home have an additional funding opportunity. A Veterans Affairs (VA) construction loan has some of the same benefits as VA mortgages but allows you to create a customized property. While VA loans come with more paperwork, and not all lenders offer them, there are significant advantages to this loan option. Read on to understand VA construction loans' pros and cons to see whether this mortgage opportunity makes sense for you. 

What Is a VA Construction Loan?

A VA construction loan is a specialized mortgage program that allows eligible veterans or active-duty service members to secure financing for the construction of their new home and its permanent mortgage.

When you purchase a home with a VA loan, you will borrow the amount needed to cover the construction price of the home and, like other mortgages, repay it with interest over a set term. You will pay for the building process through a series of fund draws, in which the lender releases funds as different stages of construction are completed.

A VA construction loan has a few especially attractive features. First, you can finance the land or lot purchase with the loan, which many other construction loans don't allow. In addition, you might not need to provide a downpayment. 

Whether you need to make a downpayment depends on your entitlement and the property purchase price. Usually, with full entitlement, you’ll only need to make a downpayment if the purchase price is higher than the appraised value of the property plus the planned home. 

VA construction loan lenders usually offer one of two loan options, either with a one-time or two-time closing. In the first case, you'll get a construction-to-permanent loan to finance the construction costs and final payment terms with one loan. With the two-time close option, you’ll get separate construction and permanent loans with different closing dates. In this case, you'll only need to pay the VA funding fee at the second closing after construction is complete.

What Are the Pros and Cons of VA Construction Loans? 

There are significant pros and a few cons to VA construction loans. Here's what you'll want to consider: 

Pros

• Finance the cost of land and construction
• Build your dream home
• Low or no down payment required in many cases
• More flexible qualification requirements than other construction loans
• More lenient credit score requirements
• You may be able to roll some VA closing costs into the loan
• No mortgage insurance required

Cons

• Not all lenders offer VA construction loans
• Depending on qualifications, you might need a down payment
• You must be an active service member, veteran or qualified military spouse to qualify
• Must start building immediately to use the VA loan to purchase land
• You'll need to pay a one-time funding fee, which can be equal to 1.4% to 2.3% of the loan value

Who Is Eligible for a VA Construction Loan?

Active-duty service members, veterans and certain surviving spouses may be eligible for VA construction loans. Specific eligibility requirements and criteria may vary. You can consult with a VA lender to confirm your eligibility. 

Generally, if you are a veteran who served from 1990 until now, you can meet eligibility requirements with any of the following criteria:

• You had at least 24 continuous months of service
• The full period for which you were called or ordered to active duty, assuming it was at least 90 days
• You'll need at least 90 days of active duty if you were discharged for a hardship or a reduction in force
• You'll need less than 90 days if you were discharged for a service-connected disability

How to Apply for a VA Construction Loan 

A VA construction loan requires additional steps compared to a traditional mortgage. Here are the steps you'll need to take to apply for a VA construction loan. 

1. Obtain a Certificate of Eligibility (COE)

You must get a Certificate of Eligibility (COE) to qualify for a VA construction loan. This document outlines your eligibility based on your minimum service requirements. This depends on your branch, service time and status and when you served. Disabled veterans may be eligible for other housing grants, financial waivers and tax benefits. In most cases, you will need full eligibility to apply for a VA construction loan. 

2. Choose a Lender

Choosing a lender is an important step in any construction loan application. With a VA construction loan, you'll be limited as not all lenders offer this type of loan. You'll need a lender that offers both VA loans and construction loans, which is a rarer combination. You can contact a regional VA center to learn about the services and lenders in your state.

3. Find a VA-Registered Builder

When you build with a VA construction loan, you must work with a VA-registered builder. Deciding on the builder early in the application process can help with the project appraisal and speed up the approval process. 

They must have a valid builder identification number to qualify as a VA-registered builder. The VA loan information hub can help you find a registered builder. You can find a complete list of VA-approved builders on the VA's website. 

Note that you cannot perform the work with a VA construction loan. You or your builder will provide the construction plans to the lender.

4. Arrange for an Appraisal of the Property

To get loan approval, you must provide the new build plans and specifications. The VA issues the formal Notice of Value listing the proposed home’s fair market value. Generally, lenders will approve the loan for the finished home's fair market value. 

To get this appraisal, you must provide the land information, including the purchase agreement or the deed of the land, along with a property survey, the purchase contract (if already under contract) and the plans and specs for the home. You will also want to confirm that the property doesn't have any encroachments that can reduce its value. 

5. Close on the Loan

Once you have a property appraisal and have completed a standard mortgage application that includes information on your income, debt, credit score and other financial information, it's time to close on the loan. To approve the loan, lenders will typically look at your debt-to-income ratio, residual income, credit score and credit history. The application process to close on a VA construction loan usually takes 45 to 60 days.

6. Begin Construction

With a VA construction loan, you'll close on the loan before the build begins. The lender will provide draws to the VA-approved builder at specific stages of construction until the home construction is complete. One important stipulation: You must start building immediately if you purchased land with the VA construction loan. If you plan to purchase land and wait to build, you won't qualify for a VA construction loan. 

7. Complete Final VA Inspections

After the construction, the home must pass a final VA inspection to certify that it was built according to the originally submitted plans. After the final inspection, the project is considered completed. The construction loan will then be converted into a permanent VA mortgage loan.

What to Do if You Can't Find a VA Construction Loan

If you can't find a lender offering VA construction loans, you can consider getting a construction loan from a builder or local lender. You always have the option to refinance it into a permanent VA loan after the home is complete. In some cases, you may get better options on construction loans from a traditional lender. Then, you can secure a VA loan after the home is built. 

Building Your Dream Home

If you can find a VA lender for construction loans, building your dream home with this type of loan has significant advantages. From low interest rates to flexible credit criteria and no mortgage insurance requirements, the ideal home for your family could be closer than you think. To get started, find the best VA lenders here. 

Frequently Asked Questions