VA Construction Loan | Requirements & Process 2023
You may have heard VA construction loans are hard to find. It’s true that a lot of VA lenders don’t offer them.
But VA construction loans do exist, and qualified veterans and active duty service members can use them to cover home construction costs. In many cases, borrowers can build their dream homes with no money down.
That said, the VA construction loan process isn’t for everyone. Many military service members will do better with a simpler VA home purchase loan.
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What is a VA construction loan?
A VA construction allows you to buy land and pay home construction costs with a single loan.
A traditional construction loan is comprised of three loans which cover:
- Land acquisition costs: The first loan buys the land you’ll build on
- Home construction costs: The second pays for construction costs in stages as your home build progresses
- Permanent loan: The third loan pays off the first two short-term loans and then serves as a long-term home mortgage loan with monthly mortgage payments
A VA construction loan can provide one, single loan to replace those three separate loans. You could use the loan to buy the land and pay your construction costs in phases as your building contractor makes progress.
And, once the home is complete, you don’t need a new mortgage because your VA loan is already in place.
It’s a great idea. If you can find one.
How to get a VA new construction loan
To use a VA new construction home loan you’ll first need to qualify for the VA home loan program.
Most active duty, retired, and honorably discharged service members qualify for VA loan benefits. Some National Guard and Reservists qualify, too.
If you’re not sure whether you qualify, check the loan program’s eligibility requirements here before moving on to the steps below.
Step 1: Find a lender that offers VA construction loans
The U.S. Department of Veterans Affairs does not lend money to home builders or homebuyers. Instead, it authorizes private lenders around the nation to provide VA-insured loans to eligible vets.
Homebuyers can find lots of VA mortgage lenders, but it’s harder to find a lender for a VA construction loan.
Below is a list we compiled of mortgage companies that advertise offering construction loans.
Editor’s Note: We aren’t affiliated with any of these companies nor have we evaluated them. Do your research before reaching out.
- AFR Wholesale. American Financial Resources is a “wholesale lender,” which means you can’t borrow from it directly. Instead, you need to find a mortgage company that is willing to use this wholesaler. AFR Wholesale says that it offers 100% financing on construction loans, requires a minimum 620 credit score, and no payments are required during construction.
- Security America Mortgage. This Texas-based lender says it offers 100% financing and requires no payments during construction.
- VA Nationwide Home Loans. This is a division of Magnolia Bank. It says it offers 100% financing on these loans, with a minimum credit score of 620, and it funds through the construction phase.
Remember — it’s up to you to check these out.
Step 2: Get your Certificate of Eligibility
To get any new VA loan — including the VA construction loan — you’ll need to show the lender your Certificate of Eligibility from the Department of Veterans Affairs. The COE proves you have earned VA home loan benefits.
You can apply for a COE yourself, or you could ask your loan officer to apply for you.
Step 3: Get preapproved to find your price range
You could consider the pre-approval process a dress rehearsal for your actual loan application. If you can get pre-approved by a VA-authorized lender, you can likely get approved for the real loan once you’re ready.
Just like a loan application, the pre-approval process will consider your debt-to-income ratio, your credit score, your income stability, and your down payment amount if you choose to make one.
Along with giving you a head start on your mortgage application, a pre-approval should show how much you can borrow and what your mortgage rate and monthly payments would be. And, it’ll show your home builder you can actually pay the construction costs.
Step 4: Find a VA-approved home builder
When you’ve been pre-approved for a VA construction loan, it’s time to find your home’s builder. The builder must be approved by the Department of Veterans Affairs.
You can search for builders in your area using this form. Talk to at least three builders to make sure you’ll be working with someone you trust and communicate well with. Make sure the builder has experience with the type of home you have in mind.
Even if you’re a licensed contractor or home builder, the VA won’t allow you to do the work yourself.
With the VA program, your builder will also have to take on more financial responsibilities than normal, and your builder will have to provide a warranty. So you need to make sure the builders you speak to know what they’re getting into before you waste too much time. Best to show them the VA’s brief overview of what’s involved.
Step 5: Get an appraiser’s OK
You have a lender and a builder, so it’s time to get some ideas down on paper. When you have plans in place that fall within your budget, you’ll need to get the approval of your VA home appraiser before the loan can move forward.
Your loan officer should contact the appraiser and make plans for the appraisal process. Since the home doesn’t exist yet, the appraiser can’t simply tour the home and make notes. Instead, the appraiser will have to assign projected value based on the plans for the completed home.
If the appraiser doesn’t think your finished home will be worth the costs of its construction, you may have to revise your plans. It’s also possible a different lot could help since location impacts real estate value.
Step 6: Finalize your loan and start building
With the VA’s approval for your builder and your building plans, you can move forward with your official loan application.
From start to finish, the loan underwriting process can take four to six weeks. And once your loan closes, the lender won’t issue a lump sum of money as it would with a purchase loan. Instead, the lender will disburse funds gradually according to your draw schedule.
A closed loan means the money is available for the builder to use as needed.
Step 7: Get your completed home VA-approved
When your new home is completed, the VA will have to inspect it again to make sure it meets the government agency’s Minimum Property Requirements. Since it’s a brand-new house, your home should pass this inspection easily, assuming the builder followed local building codes.
The VA’s seal of approval means the construction process is complete. You’ll now transition into a permanent loan with monthly payments At this point, your VA loan will resemble any other VA loan on a primary residence.
VA construction loan requirements
To get a VA construction loan, you’ll have to qualify for the loan as a borrower, and your builder and your project will have to meet the VA’s requirements.
Requirements for borrowers
Meeting the VA’s requirements for borrowers won’t be too difficult if you’re a veteran or active-duty military service member with a Certificate of Eligibility.
In fact, the VA itself doesn’t set strict underwriting requirements. VA lenders, on the other hand, can set a higher standard. Most VA lenders look for credit scores in the 640 range for construction loans.
Your lender will also set the size of your construction loan based on your debt-to-income ratio. Most lenders look for a ratio in the 41% range.
And you’ll need to pay the upfront VA funding fee which ranges from 2.3% to 3.6% depending on your level of entitlement. (First-time borrowers will pay the lower fee.) This is a large expense but it can be rolled into the loan amount and means you won’t need private mortgage insurance (PMI), so it’s still a great deal.
Requirements for builders
Compared to construction projects financed with conventional loans, builders on VA-financed projects face more oversight and responsibility. For example, builders are responsible for closing costs, though they can negotiate them into your building expenses.
The VA keeps a database of its approved building contractors. The list is long in many areas, so you should have options. Your loan officer will be able to connect you with VA-approved builders if necessary.
If you want to work with a non-VA builder, you’ll likely need a conventional loan.
Requirements for projects
The Department of Veterans Affairs only insures home loans for primary residences. The government agency also wants to ensure homes it finances are safe, affordable, and well suited for their inhabitants.
To meet this goal, the VA will appoint an appraiser to look over the plans for your home project. If the appraiser thinks your home wouldn’t be worth the money needed to build it, you’ll need to change your plans.
After completion, the appraiser will make sure the home meets the VA’s Minimum Property Requirements.
How hard is it to get a VA construction loan?
Construction loans require lenders to take on more risk, so they’re typically harder for borrowers to get.
These loans are riskier for lenders because the house you’re financing doesn’t exist yet. With a purchase loan, the lender could recoup some of its losses by selling your home if you default.
Not so with construction loans, at least not until the home has been completed. So if you’re applying for a construction loan, expect the loan officer to have a lot of questions, and don’t be surprised if the lender wants to see a higher credit score compared to traditional VA purchase mortgages.
With a VA construction loan, the VA guarantees only part of your loan. You’re actually borrowing from a private lender. And those private lenders are entitled to set their own standards and requirements, above and beyond the VA’s.
It’s still easier, in many ways, to qualify for a VA construction loan when compared to a conventional construction loan. For some borrowers, the hardest part is finding a lender who offers a VA construction loan.
VA construction loan vs traditional construction loan
If you’re a veteran who qualifies for a VA loan, a VA construction loan has a lot to offer because of what it does not require. You can borrow without:
- A down payment: If you already have another VA loan, you may need to make a down payment, though
- Private mortgage insurance (PMI): You’d need to put 20% down to avoid mortgage insurance on a conventional loan. USDA and FHA loans require mortgage insurance no matter what size down payment you make. VA loans require only the upfront VA funding fee
- VA loan limits: You can borrow up to the amount your lender approves; there’s no cap on loan sizes from the VA itself
- Geographical requirements: Unlike USDA loans, VA loans will work in any part of the U.S.
- Income requirements: Unlike USDA loans, you can use your VA loan benefit no matter how much money you earn
Conventional loans can’t offer a deal this attractive.
So what’s the catch with the VA construction loan? They’re difficult to find because very few VA lenders offer them.
If you can’t find a lender you want to work with who also underwrites VA construction loans, you may have to consider an alternative type of loan.
Alternatives to a VA construction loan
There may be a couple of other options if you hit a wall trying to find a lender that offers VA construction loans.
The obvious route is the conventional loan. You may need separate loans for buying the land, construction costs, and paying off the first two. You’ll likely need a significant down payment for one of two of the loans.
A second possibility is to get a “one-time close mortgage” backed by the Federal Housing Administration (FHA). This does much the same job as a VA construction loan.
There are a couple of drawbacks:
- FHA requires a minimum down payment of 3.5% of the loan amount
- Once you start paying down your mortgage, you’re going to pay mortgage insurance every month.
As soon as your home’s finished, you can refinance your FHA loan to a VA one. And, you can refinance 100% of the home’s market value, so you could get your FHA down payment back. Better yet, your one-time VA funding fee will eliminate your annual FHA mortgage insurance payments.
Buying a fixer-upper with a VA rehab loan
If you’re looking to buy an existing home and fix it up, you may be able to get a VA rehab loan.
VA rehab loans
A VA rehabilitation loan works a lot like a VA construction loan. But instead of building a home from scratch on a virgin plot, you buy an existing home and improve it under one loan.
Unfortunately, they share some of the downsides of those construction loans:
- They’re a bit easier to find than construction loans but they’re still not common
- You must use a VA-registered contractor
- The renovated home must comply with the VA’s Minimum Property Requirements
- Although the VA no longer imposes loan limits on rehab loans, your lender might
- You can’t borrow more in total than 100% of the likely appraised market value of the home, once work is completed, including the purchase price
You’re perhaps a bit less likely to hit a wall with a rehab loan. But you still might, especially since it’s been harder for lenders to get VA appraisers assigned to renovation projects during the COVID-19 pandemic.
FHA 203(k) rehab loans
FHA 203(k) rehab loans also enable homebuyers to roll the financing for the purchase of a house and the cost of improving it into a single mortgage. As with FHA One-Time Close Construction Loans, these can be refinanced into a standard VA loan once construction on the home is complete. Again, you’ll need a minimum 3.5% down payment for the FHA loan.
If all you want to do is improve the energy efficiency of the home you are buying, you may be eligible for an Energy Improvement Mortgage (EIM). EIMs allow borrowers to include the cost of energy-efficiency improvements in the mortgage for an existing home without increasing the down payment. EIMs allow the borrower to credit the money saved in future utility bills toward financing energy improvements.
EIMs are a type of Energy Efficient Mortgage, which broadly describes financing intended to give borrowers the opportunity to finance cost-effective, energy-saving improvements. Both EEMs and EIMs typically require a home energy rating that provides the lender with anticipated monthly savings.
Financing renovations on your existing home
It’s much easier to finance fixing up a home you already own than one you’re buying. Of course, homeowners still won’t be able to borrow more than 100% of the appraised market value of the home.
But, if you have equity, you’ll likely be able to get a VA cash-out refinance. You can spend some or all of the proceeds of that loan on home improvements.
For a VA cash-out refinance, you’ll have to qualify for the loan like you did with your purchase loan — income documentation, appraisal, and a minimum credit score. Most lenders are happy with a minimum credit score of 620 or higher, though some will consider lower.
For energy efficiency improvements to a home you already own, you may be eligible for an Energy Efficiency Mortgage (EEM), which credits anticipated energy savings into your refinance. You can probably avoid the hassle and cost of a full cash-out refinance and instead, do a VA streamline refinance (aka interest rate reduction loan or IRRRL).
What types of renovations can be made using the Energy-Efficiency Improvement program?
Any improvement that leads to the reduction in energy costs can be considered from caulking the windows to new attic insulation.
Next steps for a VA construction or VA rehab loan
There is no central list of lenders who issue VA home loans. And, everyone’s home buying needs are different. The best way to find the right loan and lender for you is to shop around and compare rates from multiple lenders.
See if you’re eligible for a VA construction loan. Start here (Mar 23rd, 2023)
VA construction loan FAQs
Why are VA construction loans hard to get?
The fact is a majority of VA lenders believe construction projects carry too much risk and involve too much hassle. So they’d rather pass on the loan than help you.
What are the interest rates for construction loans?
The VA does not set interest rates for any type of VA-guaranteed mortgage. VA construction loan interest rates will vary based upon the lender. As with any mortgage, borrowers should shop around to find the best rate.
Do I need a certificate of eligibility (COE) for a construction loan?
Yes, you will need a copy of your current COE. In most cases, the lender can obtain this for you quickly and easily.
Can you do a construction loan with VA?
Yes, the VA offers a construction loan with one closing. Unlike traditional construction loans, VA borrowers don’t need to string together three loans for buying land, paying for building costs, and refinancing the first two into a long-term mortgage. But finding VA construction loan lenders can be difficult.
Can you buy land with a VA construction loan?
Yes, you can buy land with a VA construction loan but only when the price of the land is built into construction costs. It’s usually easier to finance the land purchase separately or to build on land you already own.
Is escrow required with a VA construction loan?
Yes. Money from the construction loan will go into an escrow account. Then, as your building contractor completes phases of your project, money will be released from escrow gradually.
Are credit qualifications higher with VA construction loans?
Credit qualifying is usually more difficult with a VA construction loan, compared to a purchase loan, because the home you’re financing doesn’t exist yet. The lender takes a bigger risk because construction could be delayed or never completed.
Who offers VA construction loans?
Not many lenders offer a VA construction loan, and finding a VA construction loan lender has gotten harder during the COVID-19 pandemic. We found a few lenders that advertise this loan. They’re listed above.
What kind of house can I build with a VA construction loan?
The VA wants veterans to buy homes that are safe, affordable, and spacious. Your home will need access to a public or private street year-round. Your construction costs shouldn’t exceed the future value of your home, so your VA appraiser may balk at expensive features such as a swimming pool, hot tub, or a three-car garage. Unusually large tracts of land also tend to draw scrutiny from the VA. You’d need the VA appraiser’s approval to move forward with your project.
When do mortgage payments begin with a VA construction loan?
Loan payments on your construction loan begin when the project is complete and the loan converts to a traditional VA loan. However, the loan’s term will begin at closing, so monthly payments will be adjusted to fit the time remaining in your loan term.
Is a VA loan a good deal?
VA loans are an excellent deal for veterans and active duty service members who qualify for the program. The VA loan program’s combination of borrowing with no down payment and no annual mortgage insurance would be difficult to find elsewhere.
See if you’re eligible for a VA construction loan. Start here (Mar 23rd, 2023)