VA construction loans: Step-by-step guide

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A VA loan is often used for a home purchase, but it can also be used as a construction loan when 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 construction loan involves a good deal of paperwork. Here’s what to expect.

VA construction loan overview

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.

VA construction loans have many advantages, including:

Veterans and service members can qualify for a VA 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.

Unlike a VA loan for a home purchase, a VA construction loan 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 may 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.

Finding a VA construction loan lender

Locating a bank or credit union that offers VA construction loans can be challenging, as not all lenders provide them. Until 2018, there was limited guidance from the U.S. Department of Veterans Affairs on construction loans, so lenders had little to go on.

“Few lenders do construction loans, few still do FHA/VA construction loans and only a small number of the loan officers at those companies are really qualified to do these loans,” Thomas says.

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.

If you can’t find a lender near you, an alternative strategy is to get a conventional construction loan, and after you’re finished building the home, refinance it into a VA loan.

When Jonathan Harrington, a civil affairs officer in the U.S. Army Reserve, built a home two years ago, 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,” explains Harrington, a certified financial planner at Milestone Financial Planning in New Hampshire.

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.

Getting 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) that 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:

  • COE
  • Pay stubs
  • Federal tax returns (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 approved builders, 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 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, recommends Thomas.

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 construction loan. (If 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, note that it must be paid within 15 days of the loan closing.

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.

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.

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