What Is A VA Construction Loan And How Does One Work?

Building your ideal home may feel like a pipe dream, especially if you’re eligible for VA financing. Luckily, a VA construction loan is real and allows veterans to build a home without a down payment.

It sounds too good to be true, but it’s a competitive loan product for those who served our country.

What Is A VA New Construction Loan?

A VA home loan is a no- or low-down-payment loan sponsored by the Department of Veteran Affairs (VA). It offers active-duty service members, veterans and eligible surviving spouses flexible underwriting guidelines and no loan limits, making it easier to afford a home. 

The VA offers several loan options, including the VA new construction loan. This loan works differently from a standard VA loan. Knowing the difference can help you decide if it’s a good option for you. Keep in mind, not all lenders will offer VA construction loans. For example, our sister company, Rocket Mortgage^® does not offer VA construction loans at this time.

VA Home Construction Loan: A Definition

A VA construction loan is a temporary financing option used to fund the cost of building your home. Rather than buying a home from a developer who funds the projects, you pay the cost to construct the home yourself using a construction loan.

The temporary loan covers the cost of materials and labor to build your dream home. After the home is built, you must refinance the debt with traditional mortgage financing. 

After closing on a VA new construction loan, the lender holds onto the funds, only disbursing them as scheduled according to the building plans. The contractor and lender work together on a schedule, disbursing funds in phases as the builder completes each one.

VA construction loans, like standard VA loans, don’t require a down payment and often have flexible underwriting guidelines. In addition, VA loans don’t require private mortgage insurance (PMI), even with no money down. This can result in significant savings for veterans. However, keep in mind that you’ll likely need to pay a funding fee.

After the builder finishes the home, two things can happen:

• Single-close loan: If you have a single-close loan, you have a construction and permanent loan wrapped into one loan product. After the lender approves the final builder’s work and you have the occupancy certificate, your loan will convert to a permanent loan. The difference is that during the construction phase, you only have to pay interest on the loan. But when the loan becomes permanent, you make principal and interest payments on a 15- or 30-year term.

• Two-time close loan: If you don’t have a single-close loan, you must go through two closings. The first closing is for the VA construction loan covering materials and labor. The second loan is for the permanent mortgage to live in the home. This closing is like a refinance because you use the funds from the mortgage to pay off the construction loan.

VA Construction Loan Requirements

Here are some of the requirements you may need to meet to qualify for a VA new construction loan. For a full list and for requirements specific to your branch and time served, visit the VA’s eligibility page.

• Active-duty requirement: You must have 24 months of continuous service or serve at least the entire time you were called to active service; if it was at least 90 days.
• Credit score requirements: The VA doesn’t require a minimum credit score, but many lenders require at least a 580 score.
• Down payment requirements: Like standard VA purchase loans, there isn’t a down payment requirement. So you can build a home with a VA construction loan with no money down.
• Debt-to-income ratio: Like credit scores, the VA doesn’t set a specific debt-to-income ratio requirement. However, most lenders allow up to a 41% DTI. In addition, all lenders must ensure you meet the VA’s disposable income requirements, which means you have enough money left each month to cover your family’s cost of living.
   

Steps To Get A VA Construction Loan

Getting a VA new construction loan can easier than people may think. Here are the steps.

1. Confirm Your Certificate Of Eligibility (COE)

The first step is to get your certificate of eligibility (COE). This certificate proves you served adequate time to be eligible for a VA loan.

The easiest way to get your COE is through the VA eBenefits portal. If you can’t access it, your lender may be able to help.

2. Get A Lender And Get Preapproved

You can use your lender of choice when applying for a VA construction loan because the VA doesn’t underwrite or fund the loans. Instead, they approve certain lenders to offer them. However, it’s important to keep in mind that not all lenders provide this type of loan. 

When you find a lender, you’ll share the details of the home-building project and provide the necessary documentation to get preapproved. This may include:

• Proof of income, including pay stubs, W-2s and tax returns
• Proof of assets for any down payment, closing costs, or cash reserves required, including bank or investment statements for the last 2 months
• Proof of ownership or purchase of the land to build the home
• Contract with the builder
• Blueprints
• Proof of employment
• Proof of identity
  

3. Find A VA-Registered Builder

You must work with a VA-registered builder to use a VA new construction loan. This is a builder who is approved by the VA, understands the VA’s requirements and is willing to meet their time and work requirements.

You can find a list of VA-registered builders on the Veterans Information Portal.

4. Hire An Appraiser And Close On The Loan

Even though the home isn’t built yet, you’ll need a VA-approved appraiser. When considering the home's value, the appraiser looks at the project’s plans, including the materials and the lot (either being purchased or owned) and ensures the home meets the VA’s requirements. 

Once the appraiser approves the home, you can close on the mortgage loan. However, unlike a traditional VA purchase loan, you won’t receive all the funds simultaneously. Instead, the lender disburses the funds in phases as each is completed.

5. Complete A VA Inspection

The final step is to have a VA home inspection completed once the home is built. This ensures the home meets the VA’s minimum property requirements and that the builder stuck to the original plans submitted to the lender when you first applied for the loan.

VA Construction Loan FAQs

The following questions are the most frequently asked questions about VA construction loans to help you better understand how they work.

What type of home can I build with a VA construction loan?

A single-family home is the most common type of home to build with a VA construction loan. However, you may also use the funding for different types of homes, including multifamily homes, townhomes and some condos.

Who offers VA construction loans?

It can be difficult to find a lender that offers VA construction loans because of the higher risk they pose and because, until recently, the VA didn’t provide much guidance on them. Check with VA-approved lenders and describe your project to see if it’s something they’ll consider.

What are the VA construction loan rates?

VA construction loan interest rates are typically in line with conventional and FHA loan rates. Interest rates will depend on the market, your financial situation and the lender you choose.

The Bottom Line

VA construction loans are temporary loans to help veterans fund the cost of building a home. Unfortunately, this loan type isn’t available to everyone (only veterans and active-duty service members, National Guard, members of the Reserve or eligible surviving spouses), and you must qualify for the loan and its unique requirements.

Not all lenders offer a VA construction loan, but many do offer VA loans for existing homes. If you want to use a VA loan to buy a home, start the home loan process with our sister company Rocket Mortgage today.