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Loans

An Expert Guide to VA Construction Loans

By Aja McClanahan MONEY RESEARCH COLLECTIVE

November 9, 2022

Can you use a VA loan to build a house? Yes. You can use your VA loan benefit to cover the cost of buying land and building a brand-new home.

Although many people are familiar with VA loans for existing homes, only a few know that you can use a VA loan for new construction. This guide will explain everything you need to know about VA construction loans, including how to get one and what to expect during the process.

What is a VA construction loan?
How do VA construction loans work?
How to qualify for a VA construction loan?
How to build a house with a VA construction loan
How to choose the right VA construction lender for you
VA Construction Loans FAQs
Summary of our guide to VA construction loans

What is a VA construction loan?

VA construction loans are guaranteed by the Department of Veterans Affairs and allow veterans and active-duty military members to finance the construction of new homes. The VA doesn’t provide the loans directly to homebuyers, but it does guarantee a portion of them. This guarantee protects the lender if you default on the loan, which can increase your approval odds and result in better loan terms. Typically, you can get better interest rates and avoid coming up with a downpayment and paying private mortgage insurance (PMI) on these loans.

VA construction loans are available through private lenders, such as banks and mortgage companies. Not all VA lenders cover new construction, so you’ll have to find a financial institution that does. Some home builders have a lending division that specializes in VA construction loans, which can help the process go more smoothly for VA construction loan borrowers.

As the name suggests, VA construction loans are for eligible U.S. service members and veterans. To prove eligibility, you’ll need to obtain a certificate of eligibility (COE) to kick off the loan application process. Some lenders can get your COE for you as a convenience.

Pros and cons of VA construction loan

VA construction loans have a few key benefits, including:
Low or no down payment requirements: You may be able to finance up to 100% of the construction costs of your new home build.
Competitive interest rates: VA Loans typically offer lower interest rates than traditional mortgages.
Relaxed qualification requirements: You can get approved with a minimum credit score of 580; some lenders may OK borrowers with lower scores.
No monthly mortgage insurance premiums: Unlike other loan types, VA loans don't require borrowers to pay for monthly mortgage insurance.
One-time close option available: With a VA construction loan, you can get funding for both the land acquisition and construction costs with a single loan whose rate will lock before construction begins. There's no need to get another long-term VA loan once the building is completed.
Seller concessions: Seller concessions can help cover closing costs and other home-buying expenses. Sellers and builders can offer up to 4% of the purchase price in concessions to VA construction loan borrowers.

VA construction loans also have a few potential drawbacks, including:
No investment properties or vacation homes: VA loans are only for owner-occupied properties serving as your primary residence.
Requires a VA-approved lender: Not all lenders offer VA Construction Loans, so you may have to shop around to find one that does.
Appraisal process: Your loan amount and approval will depend on the home's appraisal. VA appraisers have to consider both the value of the finished home and the value of the land. This can make the appraisal process more complicated than for a traditional mortgage.
Additional fees: Some lenders charge origination fees or other closing costs associated with VA construction loans.

How do VA construction loans work?

Most VA construction loans have one closing. Instead of applying for one loan that covers the land and construction cost, then another long-term loan once construction is complete, you can complete all the financing in a single closing.

Before construction begins, you’ll close on your home loan and lock in your rate. Once construction is complete, your loan will be converted to a fixed VA loan for your chosen term, usually 30 years. Another nice thing about VA construction loans is that you won’t make payments during the building phase.

How to qualify for a VA construction loan

You’ll need to meet standard VA Loan eligibility requirements, as well as the following:

Be eligible for a VA home loan entitlement (as evidenced by your COE)
Occupy the property as your primary residence
Be a U.S. citizen or permanent resident alien
Have a credit score of at least 580 (some lenders may impose additional requirements)
Have a debt-to-income (DTI) ratio of 45 or less
Not have an outstanding VA loan (one workaround for this: you can refinance a VA loan)

As with all government-backed loans, lenders may impose additional requirements for borrowers. These are called lender overlays. You may meet the requirements above, but your lender could still apply more stringent (or lenient) underwriting standards. You should also know your lender’s requirements when getting a VA loan while deployed.

Note that the structure you build must also meet VA loan requirements. For instance, your property cannot be located in a flood zone or have more than four units. You should speak with your lender to get guidance on acceptable land characteristics and building plans related to your new build.

If you want more information on qualifying for VA construction loans, check out our guide on VA loan tips, as many of the requirements are similar.

What are the steps to getting a VA construction loan?

VA construction loans follow a process similar to that of traditional VA home loans, but there are a few key differences. Here’s an overview of the steps you’ll need to take:

Get pre-qualified with a VA-approved lender offering VA construction loans.
Complete your loan application with all required documentation.
The lender will order an appraisal to determine the property’s value after completion.
If approved, the lender will provide funding for the construction costs in installments (or draws).
Lock in your permanent rate for the long-term loan.
Complete construction and pass the final inspection.
Occupy the property and close on the permanent loan you’ve already been approved for in step 5.

How to build a house with a VA construction loan

Building a home is much different than purchasing one with a VA loan. Like most construction loans, your loan payments will go to the builder in draws. Your loan funds are kept in escrow, then released as each construction phase is completed satisfactorily. Working with an experienced builder familiar with this process can make all the difference. Here are some things to consider in the building process:

Your builder must be registered with the VA (the VA doesn’t license or certify builders, however)
Your builder should understand your loan amount and how to complete your project on time and within budget.
The builder may have to fund the initial phase of construction, then get reimbursed when the work is successfully completed. This process repeats (with disbursements based on intermittent inspections) until the final phase is complete and the structure passes the final inspection.
Once the final inspection is complete, you can occupy the home and will start making payments on your fixed VA loan.

How to choose the right VA construction lender for you

Not all lenders offer VA construction loans. Because there aren’t as many lenders who underwrite these loans as there are for ordinary VA loans, you should be very clear about your desire to finance new home construction when speaking with a potential lender.

Here are a few things to look for when choosing a VA lender to build your home:

A VA-approved lender
Competitive interest rates and terms
Low or no origination fees or other closing costs
A history of satisfied VA construction loan borrowers

As mentioned above, a great place to start may be with a homebuilder whose lending arm is familiar with VA construction loans. Since there are many moving parts, it’s best to find a builder and lender familiar with the VA construction loan process and requirements. It may be even better if your builder and lender work together or are one and the same.

VA Construction Loans FAQs

How long does it take to get a VA construction loan?

The process for obtaining a VA construction loan can take anywhere from 30 to 45 days.

Is a VA construction loan worth it?

There are many ways to save money with a VA construction loan. You probably won't have to make a down payment or pay for mortgage insurance. You may be eligible for lower interest rates and seller concessions to help defray closing costs. These savings opportunities could make a VA construction loan worthwhile for many eligible borrowers.

What types of homes does a VA construction loan cover?

You can use your VA construction loan to build a structure with up to four units.

Summary of our guide to VA construction loans

VA construction loans can be a great way to finance building your new home. Because there’s no down payment required and you don’t have to pay mortgage insurance, you could potentially save a lot of money with this approach. Be sure to shop around for a VA-approved lender who offers competitive rates and terms and has a proven history of successful VA construction projects and satisfied clients.

If you can’t successfully locate a lender or builder for your VA construction loan, you still have other options. You can get a home improvement loan for an existing structure and refinance it into a VA loan later. Although it’s not the brand-new home you were hoping for, you may be able to customize this home until a VA construction loan is possible for you.

In either case, weigh your options and choose the best home-buying (or renovating) approach that works for you.

Aja McClanahan

Aja McClanahan is a writer that covers personal finance and a number of related topics. Her work and personal story of paying down over $120,000 in debt have been featured in publications around the web including sites like Money, CreditCards.com, Business Insider, Inc., Experian and many others.