VA Construction Loan: What Is It And How Does It Work?

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VA Construction Loan: What Is It And How Does It Work?

Getting a VA home loan will allow you to build your dream home. However, it can be challenging. we will dive deep into VA construction loans and how you can use them to build a house.


What is a VA Construction Loan?

A VA construction loan helps you cover the cost of constructing a new home. You will only have to pay for the portions of the house that have been completed with a VA construction loan instead of one upfront payment.

There is often no down payment required for a VA construction loan. If you decide against making a down payment, private mortgage insurance (PMI) won't be mandatory. A VA construction loan also benefits from exempting specific borrowers from paying the VA funding fee, which usually goes with a standard VA loan. Those who receive VA disability and eligible surviving spouses are also exempt from this fee.

You may be familiar with the typical types of VA loans, where you get a lump-sum payment to buy an already-built house. However, if you're an active-duty service member or qualify as National Guard personnel, a reservist, a qualifying surviving spouse, or a veteran who wants to build their own house, a VA construction loan could be a great choice.


Requirements for a VA Construction Loan

Meeting specific requirements is necessary to apply for a VA construction loan. The application process for this type of loan is more time-consuming than a VA home loan.

To be eligible for a VA construction loan, you must prove you are a service member or veteran. Additionally, you will need to:

  • Find a builder approved by the VA with the necessary licenses and insurance.
  • Submit a complete set of plans, along with the builder, when applying for the loan.
  • Submit extra documentation related to the materials you intend to use.
  • Obtain an appraisal of the home plans.


Steps to Apply for a VA Construction Loan

Each homebuyer's situation may vary based on several factors, including the lender they choose to work with and the home builder they select.

Typically, the process involves the following steps:

Step 1: Find a Lender

The first step in building a home with a VA loan can be tricky since many VA lenders do not finance new constructions.

Lenders may have varying credit score requirements, interest rates, and other variables. Once you have found a reliable lender that offers these loans, you will collaborate with them to finalize the loan before construction begins. This entails submitting the same income, employment, and financial information as you would for a traditional VA purchase loan.

Step 2: Find a Builder

The VA does not approve home builders, but they must register with the department and obtain a VA Builder ID. These IDs can typically be received within a few days. The VA has a list of authorized home builders on its website. You or your builder must provide the construction plans to the lender.

Step 3: VA Appraisal

The lender will order a VA appraisal upon receiving the new build plans and specifications. Following this, the VA will issue a formal Notice of Value, which will indicate the home's fair market value. Lenders will only lend less than the home's acquisition costs and fair market value. Once the VA guidelines are met, and this significant step is completed, your loan can progress toward closing.

Step 4: Construction

Veterans can obtain a true VA construction loan that allows them to close on the loan even before the building begins. After the closing, the lender disburs funds to the builder in stages to cover the various phases of the construction of the new home.

Step 5: Final Inspection

A final inspection is mandatory by the VA upon completion of the home. In most cases, the original appraiser conducts the final inspection. This inspection aims to verify that the house still meets VA's minimum property requirements and was constructed according to the correct plans and specifications.


Key Considerations for VA Construction Loans

Qualifying for a VA construction loan is often tricky if you want to build your own home. The loan process usually takes around 45 to 60 days to complete, and you need to close the loan before the construction phase begins.

It's worth noting that owners cannot assist in the building process. The VA requires all builders to be licensed, insured, and approved. While the builder is responsible for the construction closing costs, these costs can be included in the home buyer's and builder's agreement.


Frequently Asked Questions Regarding VA Construction Loans

Let's go over some additional questions regarding VA construction loans.

What If I Can't Find a VA Construction Loan?

VA lenders can decide which loans they offer, even though the VA insures a part of each loan. The inherent risk of new construction often makes many VA lenders hesitant to provide loans for such projects. Veterans United and other lenders do not offer VA construction loans for building new homes. However, it's possible to obtain a construction loan from a local lender or builder and then refinance it into a permanent VA loan, an alternative to a VA construction loan.

What Kind of House Can I Build With a VA Construction Loan?

Each lender establishes specific criteria for homes eligible for VA construction loans. It's unlikely that mobile or manufactured homes will be approved. To determine whether the type of home you plan to build is eligible, contact your loan officer or lender for further information.

What Determines Interest Rates for VA Construction Loans?

The determination of interest rates on VA homes is not regulated or set by the Department of Veterans Affairs. Instead, the borrower's lending history and credit score primarily influence the interest rates. The lender also considers other factors, such as the borrower's debt-to-income ratio, to decide on an appropriate interest rate.

When Do Mortgage Payments Begin With a VA Construction Loan?

Once the home's construction is finished, payments on the VA mortgage will commence, and you must repay the loan within the remaining term. It will be necessary to have a conversation with your VA lender to discuss the repayment terms.


The Bottom Line

Active-duty service members or veterans who want to build a home can explore various loan options to finance their projects. However, VA construction loans offer an added advantage as they allow them to build a house without making a substantial down payment or even without any down payment. Although, getting approval for this type of VA loan to build a home may be challenging.

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