VA Construction Loans Guide: Everything You Need to Know

VA Construction Loans Guide: Everything You Need to Know

A U.S. Department of Veterans Affairs construction loan is a great option for financing your home and land. You can get a VA-insured home loan. This means that you won’t need to pay PMI (private mortgage insurance) or make a down payment as with traditional VA Construction Loans.

This guide explains how you can use a VA loan to buy a house at a reasonable rate and for a longer term.

What is a VA Construction loan?

VA construction loans are available for the purpose of buying land and building a primary residence. After construction is completed, you can convert this temporary financing option to a permanent VA Loan.

This loan is different than the VA purchase loan that is intended for purchasing an existing home. Instead, your loan proceeds will be used for the purchase of the lot and construction costs.

These military service histories can make you eligible:

  • You must be currently on active duty (Reserve and National Guard personnel can also qualify).
  • Retired with no dishonorable discharge
  • Spouse of a veteran survived

Additional lender requirements could apply, such as a qualifying score or debt to income (DTI) ratio. However, not all VA lenders provide construction loans. It is possible to take longer time searching for a participating lender.

Notice: VA construction loans require more documentation than other VA loans. The lender must approve your building plan. You also have to authorize each loan disbursement that is made for contractors. Additionally, there are mandatory inspections throughout construction.

How a VA Construction Loan Works

This is how you can get a VA loan to buy a house.

Get a building plan approved

For finalizing your building plan and financing details, you’ll need to work with a VA approved lender and builder. The underwriting process takes approximately 45-60 days.

There may be two types of VA construction loan loans available. The loan type will determine how many mortgage closings are possible and when the VA funding fees will be due.

  • One-time close (single close): A construction-to-permanent loan finances your construction costs and final payment terms with one loan. The VA funding fee is due within 15 calendar days of closing the first loan.
  • Two time close You will receive a construction loan and a permanent loan with different closing dates. The VA funding fee must be paid at the second closing, after the building is completed.

The lender requires licensed contractors to complete your home within the deadline given by the lender after you have closed on the construction loan. According to VA guidelines you typically have 12 months from closing before lenders start collecting mortgage payments.

Complete Home Construction

For each phase, contractors are paid multiple disbursements also known as draws.

The lender transfers these funds directly to the builder from an escrow bank. You are not responsible to manage the money but must authorize each draw by writing to the lender.

Although multiple draws can be cumbersome, it reduces borrowing costs and you don’t get your entire loan amount up front. This distribution process reduces the risk for the lender as a home under construction does not have the same collateral value that an existing home.

Transition to a Permanent loan

You can convert your construction loan into a permanent loan once your home passes inspection. You have two options if you want to keep your VA loan: a VA purchase or cash-out refinance.

VA Construction Loan Requirements

You must follow these VA loan requirements before you start construction.

  • Certificate to Eligibility: A COE must be obtained before you apply for a VA home loan.
  • Minimum Credit Score of 620. The VA doesn’t require a minimum credit score. But lenders will often require a minimum FICO score of 620.
  • Low DTI: Lenders might also require a DTI lower than 45% to 50%. You may also qualify for a higher interest rate with a lower DTI.
  • Proof Of Income: For verification of your income, you might need to submit recent pay stubs or tax returns.
  • Registered Builder: Only VA-registered builders can finish the work. Lenders might also require that the contractor or builder be licensed, insured, bonded, or bonded. You can find registered contractors by searching the VA’s builder database.
  • Origination appraisal The building plan must comply with the VA Minimum Property Requirements, MPRs and local building codes. You must make this your primary residence in order to be qualified. It cannot be a second or investment property.

VA Funding Fee & Down Payment Requirement

VA-backed loans have the advantage of not requiring a down payment. There are no mortgage insurance premiums to pay, unlike other loan programs.

Instead, you pay an upfront VA funding fee. It is a portion of the loan amount. An upfront contribution can lower your funding fee as well as your lifetime borrowing costs. The following fees are applicable to first-time borrowers. They are based upon their down payment:

  • Lower 5%: 3%
  • 5% – 10%:65%
  • 10% or More:4%

The fee might not be due until the building is completed. This fee can also be included in your loan amount. This allows you to save money upfront, but increases your financing costs.

Additional VA loan closing fees may also be applicable, for example, a maximum of 2% construction fee.

How to Apply for VA Construction Loans.

These steps can help find a lender who offers VA-backed loans for construction.

Gather the necessary documents

Start by compiling all of the required income and credit documentation that lenders will need in order to complete the underwriting.

You can get a Certificate of Eligibility to verify your service status. This will help you get started on the application process.

Preapproval for a Loan

Next, search for a bank/credit union that offers VA loans. It is important to note that not all VA lenders offer construction loans. This makes the search process more time-consuming than for a home loan.

An approval can help you calculate your borrowing limit to determine how much money it will take to buy land or build an affordable house.

As with any loan, it is crucial to compare mortgage rates from multiple lenders to determine the best rate and term to suit your needs.

Submit Building Plan

Once you have identified a VA registered builder, your home proposal can be submitted for approval.

The VA appraisal is the first step in determining your loan limit. This will also determine if you can afford a $0 downpayment and if your home meets the minimum property standards.

Sign Closing Documents

After your loan officer approves your proposal for a building, you can agree to your payment terms. This will help you determine your total loan fees as well as your repayment plan.

When you’re ready to move in to your new home, talk to your lender about whether your construction loan can be converted to a permanent one. Planning ahead can save you stress later.