Active military members and veterans often rely on the VA loan program guaranteed by the U.S. Department of Veterans Affairs (the VA) to purchase a home. However, if you want to build a home, you can also take advantage of a VA construction loan.

Not all VA loan lenders offer construction loans, so they’re not as well-known. The loan process and eligibility can also be quite complicated. Read on to learn more about how these loans work, what you can expect when building a house, and eligibility requirements.

What Is a VA Construction Loan?

VA construction loans are short-term loans that help you cover the cost of building a new home. However, unlike a VA mortgage loan, which involves a lump-sum payment, you’ll receive the money in small amounts through several periodic distributions to pay for the portion of the home that is constructed.

Usually, there are no down payment requirements for a VA construction loan, and you won’t have to pay private mortgage insurance (PMI).

Another advantage of this type of loan is that many borrowers won’t have to pay the VA funding fee. This exemption is applicable to those receiving VA disability and qualified surviving spouses.

Types of VA Construction Loans

Here are the two most common options for VA construction loans:

  • One-time close loan or Single-close loan: This type of loan will cover the cost of construction and will then convert to a permanent mortgage loan, and you can start making payments. You’ll only pay for closing costs once with this option.
  • Two-time close loan: With this option, the loan will pay for the construction and will be due once your home is built. You’ll then have to take out a regular mortgage loan to repay it. There’ll be two closings, and you’ll have to pay for closing costs twice.

Uses of a VA Construction Loan

A VA construction loan can be used to build a single-family home. However, the VA has several restrictions on using VA benefits to purchase land.

For example, you can’t purchase land with your benefits unless you start construction immediately after purchase.

Process of a VA Construction Loan

Here’s a look at how a VA construction loan usually works:

  • Start by qualifying for the loan by getting your Certificate of Eligibility (COE).
  • Purchase the land and ensure it meets VA requirements.
  • Find an approved lender and get a mortgage pre-approval.
  • Submit your construction plans for an initial appraisal and ensure your building plans are approved.
  • Find a VA-registered contractor with a valid builder identification number.  
  • Close on the VA construction loan.
  • The funds will be released in portions for different construction phases.
  • Once the construction is complete, it must pass inspection.

Pros and Cons of VA Construction Loans

A VA construction loan can be a good option for those who want to custom-build a home. However, like any other type of loan, it has its pros and cons.

Pros

  • You may be able to get the loan without a down payment
  • No private mortgage insurance is required at any time
  • VA funding fees may be waived for some veterans
  • More relaxed income and credit criteria
  • Closing costs may be rolled into the loan

Cons

  • Not all lenders offer VA construction loans
  • Builder must be VA-approved
  • You must meet the land and property requirements
  • Appraisals can take much longer
  • Closing costs and interest rates may be higher than conventional mortgages
  • You can’t do the construction yourself

VA Construction Loan Requirements

There are a number of eligibility requirements you must meet to get a VA construction loan:

  • You must get a Certificate of Eligibility (COE) from the VA.
  • There’s no minimum credit score requirement specified by the VA, but most lenders require a FICO score of at least 620.
  • Your debt-to-income ratio must be 41% or less. Some lenders may waive this requirement in special circumstances.
  • You’ll need to demonstrate that you can afford mortgage payments with your residual income.
  • You’ll need to use a VA-approved lender and builder.
  • You must submit your construction plans, a list of needed materials, and blueprints to the lender.
  • You’ll need to get an appraisal and a VA property certification.
  • You’ll require an insured 10-year protection plan or a one-year warranty from the builder.

How To Apply for a VA Construction Loan?

Here’s how to apply for a VA construction loan:

  1. Find a VA-approved lender that offers construction loans.
  2. Work with your loan officer to get a pre-approval.
  3. Find a VA-approved builder.
  4. Submit the plans for the new construction to your lender for approval.
  5. Submit a completed loan application, including your COE, to the lender for approval.
  6. Go through the appraisal process.
  7. Review the terms of the loan agreement.
  8. Pay the closing costs, appraisal costs, and funding fees to close the loan and begin construction.

Common Fees Associated With VA Construction Loans

There are several different types of fees you’ll need to pay when you borrow a VA construction loan. Some of these fees are common across all conventional loans:

  • Origination fee: Lenders typically charge origination fees as a part of the closing costs.
  • Closing costs: On average, homebuyers pay 3%-6% of the loan amount as closing costs. However, VA borrowers may have to pay less.
  • VA funding fee: The funding fee covers the cost of the loan guarantee, but it may be waived for some veterans. The fee can also be rolled into the purchase loan.
  • Construction fee: Lenders can charge an additional home construction fee of up to 2% of the loan amount.
  • Appraisal fee: VA appraisal fees can range from $525 to $1,550. You can find a list of appraisal fees for all states online.

Alternatives To VA Construction Loans

If you don’t think a VA construction loan is right for you, there are a few other alternatives to consider:

  • One option is to get a traditional construction loan from a lender and then refinance it to a VA home loan once construction is completed.
  • Look for other options like Federal Housing Administration (FHA) Loans. Many of these loans don’t require a very high credit score or down payment, but you’ll typically have to pay private mortgage insurance.

Check To See if You Qualify for a VA Construction Loan

There are several loan options available if you want to build your dream home. However, for veterans and active-duty military service members, VA construction loans are a good option with fewer upfront costs since they don’t require any down payment or private mortgage insurance.

The approval process for this type of loan isn’t easy since you’ll need to find a VA construction lender and a VA-registered builder. We recommend looking for lenders that offer this loan option, comparing their mortgage rates, ensuring the lenders are listed on NMLS, and comparing it to other financing options to make an informed decision.