A VA loan — which is guaranteed by the United States Department of Veterans Affairs (VA) — is often used for a home purchase. But this type of mortgage also can be used as a construction loan for veterans building or renovating a home. Not all VA lenders offer construction loans, though, and if you find one that does, the process of getting a VA home construction loan involves a good deal of paperwork. Here’s what to expect.

What is a VA construction loan?

If you’re a veteran or military service member eligible for a VA loan, you can use that loan as a construction loan to purchase land and build a new home from the ground up. You can alternatively use the loan to purchase an existing home and modify it to fit your vision.

Veterans and service members who meet the minimum service requirement (more on that next) can qualify for a VA home construction loan with a credit score as low as 640 and a higher debt level than allowed for a conventional construction loan.

Many are also exempt from paying the VA funding fee, a typical requirement for VA loans, according to Jerry Thomas, a construction loan officer specializing in VA and FHA loans at Cranbrook Loans in Clinton Township, Michigan. For example, he says, “Vets that collect VA disability income are exempt from the fee.”

Unlike a VA loan for a home purchase but similar to other construction loans, a VA loan for land and construction is paid out in installments as various milestones in the project are met. The funds are put into a draw account to be paid out to the builder during the construction process. Requirements can vary from lender to lender, but typically, the lender gets the borrower’s approval as construction phases are completed, after which the next payment is released to the builder.

VA construction loan requirements

The VA doesn’t back loans — whether for new home purchases or construction — for just anyone. You need to meet specific requirements as far as your service goes. Those vary depending on when you served.

If you’re in active duty, you’re eligible for a VA home construction loan as soon as you hit 90 days of continuous service.

If you’re a veteran who served between 1990 and now, you can meet those eligibility requirements with any of the following:

  • At least 24 continuous months of service
  • The full period for which you were called/ordered to active duty, assuming it was at least 90 days
  • At least 90 days if you were discharged for a hardship or a reduction in force
  • Less than 90 days if you were discharged for a service-connected disability

If you served longer ago than the last few decades, visit the VA’s eligibility page and find the category that applies to you. Your minimum service requirement will be laid out in the appropriate dropdown.

Good news: if you qualify, relatively new guidelines mean that you won’t be subject to any VA construction loan limits.

How to get a VA construction loan

1. Confirm eligibility and entitlement

The first step to securing a VA construction loan is to obtain your Certificate of Eligibility (COE). This proves that you’ve met the minimum service requirements to be eligible for a VA loan.

You can apply for your COE online through the VA eBenefits portal. If you’re a veteran, you’ll need your DD214 discharge papers. If you’re an active-duty service member, you’ll need a statement of service signed by your personnel officer.

2. Choose a lender and get preapproved

The VA doesn’t lend money directly; instead, you’ll apply through a bank, credit union or other kind of lender that offers VA loans. Keep in mind that it can be difficult to find a lender that’ll extend a VA construction loan, even if it does provide VA purchase loans.

“Start by having a conversation with the loan officer about your construction project and your qualifications,” Thomas suggests. “Have that loan officer review your income, assets and credit. Then, connect your mortgage loan officer with your builder to discuss the program.”

If you’ve been fortunate to find a lender, be sure to get preapproved for the loan. Here are the documents you should have on hand:

  • Your COE
  • Pay stubs
  • Federal tax returns (for the last two years)
  • Bank statements
  • Statements from any investment accounts or retirement accounts
  • Driver’s license or other photo ID
  • Deed to the land, survey and settlement statement (if you already own the land)
  • Purchase agreement for the land (if you haven’t purchased it yet)
  • Construction contract with the builder

3. Work with a registered builder

To qualify for a VA construction loan, you must work with a VA-registered licensed and insured builder. (Usually, you can’t be considered the builder.) Your lender may have a list of builders that are already registered with the VA (meaning they have a VA Builder ID Number that tracks their performance), or may require your builder to go through the VA registration process.

“This program holds the builder responsible for completing the project on time and on budget,” says Thomas. “Not every builder will work with the VA terms.”

You can search for a VA-registered builder through the Veterans Information Portal. If you’re working with a builder that isn’t registered with the VA, ask the builder to submit the following items to the local VA Regional Loan Center in order to obtain a VA Builder ID number:

4. Submit project plans

Once your builder is registered, you’ll need to submit the plans for construction to your VA home construction loan lender. Your builder should provide paperwork describing the building materials, lot and the future home site.

“Before you can apply for a VA construction loan, you have to have your land info — the purchase agreement, or the deed, if you already own the land,” Thomas says. “A survey is also very helpful, and the contract, plans and specs for the home.”

5. Get a home appraisal

You’ll also be required to get a VA home appraisal, which will be based on the plans for the project. To ensure that the home meets the requirements for a zero-down payment loan, stick with designs and plans that are in line with standards for the area, Thomas recommends.

For example, a house plan that is grand and excessive compared to neighboring houses, or one that has an unusual design, might cause your appraisal to come in lower than what is needed to obtain the loan.

6. Close the loan

With all the extra paperwork required to get approval, it can take 45 to 60 days or longer to process a VA home construction loan. (If you got a VA loan for land and construction and you’re purchasing land, you may want to make the seller aware of the expected time frame.)

If you’re obligated to pay the funding fee (the VA’s version of mortgage insurance), it will be be added to your loan amount.

After the loan closes, the funds will be disbursed based on the timeline of the project. For example, at closing you might receive only the amount needed to complete the lot purchase and your builder might receive a 10 percent advance. The balance of the loan goes into a draw or escrow account to be drawn down in installments during construction as milestones are met.

7. Complete final VA inspection

After construction is finished, you’ll need a final VA inspection to certify that the home was built according to the plans that were originally submitted. After the final inspection, the project is considered completed. The loan will then be modified into a permanent VA loan.

What can I build with a VA construction loan?

This depends more on your lender than VA requirements. For this type of construction loan, VA guidance largely comes into play through the initial project plan appraisal and the final inspection. New loans taken out after 2020 are not subject to any VA construction loan limits, which means you can go as big as you want, technically speaking.

That said, your lender wants to know that your loan makes sense. So they generally won’t let you overbuild for your area.

They may also have requirements about the type of house you can build. Many lenders won’t issue a VA home construction loan for a mobile/manufactured home, for example.

Pros and cons of VA construction loans

Pros

Getting a VA loan for land and construction has many advantages, including:

Cons

That said, there are some drawbacks:

  • If you’re a veteran, you need to get your COE.
  • You need to find both a builder and a lender that works with the VA.
  • Some builders won’t take on VA loan projects because it forces them onto a stringent timeline.
  • You’ll add more work into an already stressful project (building a new home) by bringing the VA and its added steps into the process.

Finding a VA construction loan lender

Locating a bank or credit union that offers VA construction loans can be challenging. Few lenders do construction loans, and of those that do, only a small percentage provide FHA or VA construction loans. Until 2018, there was limited guidance from the U.S. Department of Veterans Affairs on construction loans, so the few lenders permitted to do these loans had little to go on.

Your best bet is to find a lender in your area that offers VA loans and go from there. (You can quickly get estimated VA loan offers through Bankrate.) Since not all VA lenders offer construction loans, ask to speak to a loan officer about the project you have in mind. When you find a lender, be sure to prepare the necessary paperwork in advance of getting preapproved.

Alternatives to a VA construction loan

If you can’t find a VA home construction loan lender near you, an alternative strategy is to get a conventional construction loan. After you’re finished building the home, you might choose to refinance it into a VA loan with a more competitive rate.

When Jonathan Harrington — a civil affairs officer in the U.S. Army Reserve and a senior advisor at Milestone Financial Planning in Milestone Financial Planning in New Hampshire — built a home, he considered a VA construction loan, but couldn’t find a lender willing to fund one.

“Also, the builder that I was using was not registered with the VA and I didn’t want to put the additional burden on him for getting vetted by the VA,” Harrington says.

Harrington ended up getting a regular construction loan at a local bank. After the project was finished, he rolled the construction loan into a conventional 30-year mortgage.

“I later refinanced into a VA loan when rates dropped, and that was a seamless process,” Harrington says.

Bottom line

VA loans, including VA construction loans, offer unique benefits compared to their conventional counterparts. That said, a VA home construction loan can be more challenging to obtain.

If you’re looking to build a home from the ground up or modify your existing home, though, this type of loan can be worth the extra logistics.