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If you’re a veteran and want to build a new home, you have the option of no-down payment financing backed by the U.S. Department of Veterans Affairs. Here’s what you need to know about building a home with a VA loan.
- What is a VA construction loan?
- VA construction loan requirements
- What can I build with a VA construction loan?
- VA construction loan vs. construction loan
- VA construction loan rates
- VA construction loan pros and cons
- How hard is it to get a VA construction loan?
- Where can I find a VA construction loan lender?
- Alternatives to a VA construction loan
What is a VA construction loan?
When purchasing a home with a VA loan, you borrow the amount that’s needed to cover the price of the home and repay it with interest over a set term. With a VA construction loan, however, you pay for the build through a series of fund “draws” as different parts of the construction process are completed.
With a VA construction loan, you can finance the land or lot purchase as well as the construction of the home, and in many cases, closing costs can be rolled in and financed. Plus, depending on the situation, you might not need to provide a down payment. Generally, you’ll only need to put money down if the price is higher than the appraised value.
There are two main types of VA construction loans:
- Construction-to-permanent or one-time/single close loan – With a construction-to-permanent loan, one loan covers the cost of the project, and then converts to a “regular” mortgage to repay what was borrowed. With this kind of arrangement, you only have to do the paperwork and pay for closing costs once.
- Construction-only or two-time close loan – With a construction-only or two-time close loan, one loan pays for the construction, but once the project is complete, you’ll have to take out another loan to repay it. This means you go through two loan closings, and you’ll need to qualify for the second loan as you did for the first.
VA construction loan requirements
To qualify for a VA construction loan, there are several requirements you must meet, the first being working with a VA-approved lender. The other eligibility criteria include:
- Certificate of eligibility – You’ll need a Certificate of Eligibility (COE) from the VA. You can file for this certificate online or submit VA Form 26-1880 to your local VA office.
- Credit score – There’s no minimum credit score set by the VA, but you might need to meet minimum requirements from the lender you work with. In many cases, this means a credit score of at least 620.
- Debt-to-income (DTI) ratio – You’ll need to have a DTI of 41 percent or less to get most VA loans, although there are circumstances where that requirement is waived (if you have tax-free income, for example). In addition, using a formula based on your home’s location, the size of your household and other factors, you need to show that you can handle your loan payments with your residual income, which is what you have left after you pay other debts and home maintenance costs.
- Funding fee – While you don’t have to pay mortgage insurance for a VA loan, you are required to pay a funding fee. The amount of the funding fee is based on your down payment and how many times you’ve used a VA loan.
- Construction plans – You’ll need to submit your construction plans to the lender, including blueprints and the materials needed for the project, and get an appraisal to determine the value of the home you plan to build. Additionally, you’ll need a VA property certification before you can move forward.
- Builder approval – In addition to using a VA-approved lender, you’ll also need to use an approved builder. Your builder needs to either already be registered with the VA or register and obtain approval from the VA.
- Warranty – You’ll need at least a one-year warranty from the builder or an insured 10-year protection plan.
If these conditions are met and you’re approved for a construction loan, know that a VA inspector will be paying attention to the project every step of the way. As each part of the construction process comes to an end, the inspector will review the work and then approve further draws to cover costs.
What can I build with a VA construction loan?
VA construction loans must be used to construct a single-family home. These loans aren’t designed for building multi-family housing or other projects. While you can make some customizations to the home, avoid adding anything too far out of the ordinary to the design. Overall, it’s important to make sure that what you build is similar in size and style to other homes in the area. The same is true of the lot size — when you build, try to do so on a lot that is similar in size to others in the area.
VA construction loan vs. construction loan
In general, a regular construction loan has more rigorous underwriting requirements, such as stricter credit score and DTI criteria. Additionally, you’ll likely need to make a substantial down payment to get a regular construction loan.
With a VA construction loan, you don’t usually need to make a down payment, and you have a little more flexibility with credit requirements. For some veterans, it can be easier to get a VA construction loan than to qualify for a regular construction loan.
However, you might be subject to more scrutiny and restrictions with a VA construction loan compared to a regular construction loan. In the case of a VA construction loan, the lot size and type of home you’re allowed to build are usually limited, and the project might take longer to finish depending on the frequency of inspections.
VA construction loan rates
Construction loan rates in general are higher than the rates for a mortgage used to buy an existing home. That’s because a mortgage is a secured loan, meaning the home is the collateral, and if you default on your payments, the mortgage lender can recoup its losses by selling that collateral. Lenders don’t have this option with a construction loan, since the home isn’t built yet, so the lender is assuming more risk and setting rates accordingly.
Note that individual lenders set their own interest rates for VA construction loans; the VA doesn’t determine rates. The rates you see advertised by a lender can also change multiple times throughout the day.
VA construction loan pros and cons
- Might not need a down payment
- Potential to have the funding fee waived for certain veterans, such as those with service-connected disabilities
- No mortgage insurance
- Can roll closing costs into the loan
- Relaxed credit and income criteria
- Builder and lender must be VA-approved
- Some appraisals can take longer
- Closing costs can be higher due to funding fee and other expenses
- Funding fee can be a cost barrier
- Construction loan rates usually higher
How hard is it to get a VA construction loan?
Not many mortgage lenders offer VA construction loans, so it can be challenging to find one to fund your project.If you have a lender at the ready, though, qualifying for a VA construction loan might be easier than qualifying for a regular construction loan. VA construction loans do not require a down payment, and typically have more lenient borrower requirements. However, VA construction loans also have specific property requirements, and your lender might impose their own requirements, or overlays, as well, that can make it more difficult for you to qualify.
Where can I find a VA construction loan lender?
Not all VA loan lenders are also VA construction loan lenders. A lender might offer a VA loan for a home purchase, but not a VA loan to build a new home. To find a VA construction loan lender, start by visiting the VA website to get a list of VA-approved lenders. Here is a list of some lenders or brokers that offer this type of loan:
- American Financial Resources
- CHM Lending
- GO Mortgage
- Security America Mortgage
- University Lending Group (University Bank)
- VA Nationwide Home Loans (Magnolia Bank)
It can be beneficial to work with a lender that has experience with VA construction loans because there are a number of qualifications and steps in the process. Before you commit to a VA construction loan offer, compare rates and terms between lenders, if possible.
Alternatives to a VA construction loan
If you’re having difficulty finding a VA construction loan lender, or if you don’t qualify for a VA construction loan, you have at least two other financing options: one is to get a traditional construction loan during the build and then a VA loan to finance the home. The second is to get another government-backed construction loan, such as an FHA construction loan or a USDA construction loan. Keep in mind, however, that these might have different requirements or more rigid underwriting compared to a VA construction loan.