Key takeaways

  • You can use a VA construction loan to buy land and build your dream home or modify an existing house to meet your vision.
  • Lenders place VA loans in draw accounts, paying contractors when they achieve benchmarks.
  • To qualify, you'll need a certificate of eligibility proving your military service.

Former and active members of the military often use a VA loan — which is guaranteed by the United States Department of Veterans Affairs (VA) — to buy a home. But if they’re interested in building or renovating a home, the VA has that covered too — with its VA construction loan program.

These loans may be lesser-known because not all VA lenders offer them. And if you find one that does, the process of obtaining the financing involves a good deal of paperwork. Here’s what to expect when renovating or building a house with a VA loan.

What is a VA construction loan?

Whether you want to tackle a reno or new construction, a VA loan can come through. If you’re an eligible veteran or service member, you can use new construction VA loans to purchase land and build a 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 construction loan with a credit score as low as 640 and a higher debt level than conventional construction loans usually allow.

Some veterans don’t even have to pay 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, vets who “collect VA disability income are exempt from the fee,” he says.

Building a house with a VA loan is a fairly involved process — but then, construction loans tend to be complex in general. Unlike the regular VA loan (or any home-purchase mortgage), which distributes funds in a lump sum, the money from these loans are put into a draw account. They’re then paid out to the builder in installments as various milestones in the project are met. Requirements can vary among VA construction loan lenders, 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 new construction loan qualifications

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 on active duty, you’re eligible for a VA 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 build a house with a VA loan

Step 1: Get a Certificate of Eligibility (COE)

Before you can take on new construction, VA loans require a key piece of paperwork. 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.

Step 2: Choose a VA lender and get preapproved

The VA doesn’t lend money directly — private VA-approved lenders do that. 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 VA construction loan lenders, even if the lending institution does provide VA purchase loans.

“Start by having a conversation with the loan officer about your construction project and your qualifications,” says Thomas. “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

Step 3: Work with a VA-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:

Step 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,” says Thomas. “A survey is also very helpful, and the contract, plans and specs for the home.”

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.

That said, when you’re building a house with a VA loan or any other type of financing, your lender wants to know that your financing 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.

Step 5: Get a home appraisal

When building a house with a VA loan, you’ll also need to get a VA home appraisal; since no structure exists yet, obviously, it 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.

Step 6: Close on the VA new construction 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 (the VA’s version of mortgage insurance), it will be added to your loan amount.

After the loan closes, the funds will be disbursed in installments, 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 rest the lenders place into an escrow account to be drawn down during construction as milestones are met.

Step 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.

Finding a VA construction loan lender

Locating a bank or credit union that offers VA construction loans can be challenging. Few lenders handle construction loans in general, 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.

When you’re trying to find out who offers VA construction loans, your best bet is to find a VA-approved lender in your area. (You can quickly get estimated VA loan offers through Bankrate.) 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.

Pros and cons of VA construction loans

Before undertaking your project, you’ll want to consider the benefits and drawbacks to using VA construction loans.

Getting a VA construction loan has many advantages, including:

Some of the biggest cons when it comes to building a house with a VA loan include:

  • 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 into a stringent timeline.

Bottom line

If you’re an eligible service member, using a VA construction loan can help you build a home. These loans offer benefits over conventional loans, such as lower interest rates and closing costs. However, it will require more work, as you’ll need to locate a VA lender and builder. Some contractors won’t want to work on the project due to the tight deadlines the VA imposes. Therefore, you’ll want to consider all your options first to ensure this is the right approach for you.

FAQ about VA construction loans

  • Rates on VA construction loans don’t get set or regulated by the VA. Instead, the lender gets to decide what interest rate to offer you based on your specific borrower profile. VA construction loan lenders consider key aspects like your credit score, your income and your debt-to-income ratio.
  • If you can’t find VA construction loan lenders 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.
  • You’ll need to start making mortgage payments once the contractors finish building or modifying your home.