VA Construction Loan: What It Is and How It Works

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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 like 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 VA Construction 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.

“In light of the continued short supply of single-family homes, condos, and townhouses, building a new home has become the preferred method for many VA loan borrowers to side-step the inventory issue entirely and use their hard-earned home loan benefit,” shares Brad Reichert, founder and managing director of Reichert Asset Management LLC.

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 how a VA construction loan typically works:

1. Qualify for the loan by obtaining your VA Certificate of Eligibility (COE).
2. Purchase land that meets VA eligibility requirements.
3. Find an approved lender and secure loan pre-approval.
4. Submit construction plans for an initial VA appraisal and lender approval.
5. Hire a VA-registered contractor with a valid builder identification number.
6. Complete the VA construction loan closing process.
7. Funds will be released in phases through a VA-approved draw schedule.
8. Once construction is complete, the home must pass a VA compliance inspection.

Pros and Cons of VA Construction Loans

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

VA Construction Loan Requirements

To qualify for a VA construction loan, you must meet the following requirements:

• Obtain a VA Certificate of Eligibility (COE)
• Meet lender credit score requirements—most require a FICO score of 620 or higher
• Maintain a debt-to-income (DTI) ratio of 41% or lower, though some lenders allow exceptions for strong financial profiles
• Demonstrate sufficient residual income to cover mortgage payments
• Work with a VA-approved lender and builder
• Submit construction plans, materials list, and blueprints to the lender
• Complete an appraisal and a VA property certification to confirm the property meets VA standards
• Provide an insured 10-year protection plan or a one-year builder’s warranty

How To Apply for a VA Construction Loan

Here’s how to start the VA construction loan process:

1. Find a VA-approved lender offering construction loans.
2. Work with your loan officer to get pre-approved.
3. Choose a VA-approved builder.
4. Submit your construction plans and loan application (including your COE) to the lender for approval.
5. Complete the appraisal and lender approval process.
6. Review the loan terms and agreement.
7. 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 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, depending on the property's location and type. 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 possible solution is to get a traditional construction loan from a lender and then refinance it to a VA home loan once construction is completed.
• Seek 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 choice with fewer upfront costs since they don’t require any down payment or private mortgage insurance.

The approval process for a VA construction loan can be a bit more complex, since you’ll need both a VA-approved lender and a registered builder. Start by checking if your lender is listed on the NMLS database, compare mortgage rates, and weigh this option against other financing routes to find what fits your budget and timeline best.

A little planning upfront can go a long way in helping you build a home that fits both your needs and your budget. When you know what to expect, it’s easier to make choices that align with your goals.