VA Construction Loans: Process & Requirements

CASAPLORER^®Trusted & Transparent

A VA construction loan is a mortgage program offered by the U.S. Department of Veteran Affairs. The purpose is to allow qualified veterans to build a new home without a down payment.

Once the construction is done, the construction loan will transition into a standard VA loan. The mortgage combines multiple loans, which ideally results in a seamless transition. However, successfully finding a VA construction loan lender can be challenging.

This guide will explain the loan, requirements, and process of getting one. Continue reading to learn everything about VA construction loans.

Most Popular States for VA Loans

Total VA Lending Volume, Q3-2022

What is a VA Construction Loan?

The idea behind the program is to help veterans build a primary residence. Sometimes, the loan bundles three separate loans together. For example, you may find a VA construction lender who allows you to finance buying land, building, and refinancing into a mortgage. This is known as a one-close mortgage because it combines multiple mortgages into one closing.

However, most VA lenders don't offer this feature. Instead, you will likely need to begin with a conventional construction loan which you can then refinance into a VA loan. This section will explain the different pathways to building a primary residence through a VA loan. They are ordered from most to least favorable. However, the more favorable loans tend to be hard to find.

Top 10 VA Lenders

Top VA Loan Volume, Q3 2022

Pathway One: VA One-Time Close Construction Loan

This is the least available but the best type of VA construction loan available. If you can find a VA one-time close construction loan in your area, it's worth pursuing. They are similar to construction to permanent (C2P) loans. This option allows 100% financing to buy land and build a home. At the end of construction, your loan will automatically convert to a VA loan, and you'll have to make regular mortgage payments on the balance. This pathway has two benefits:

• No down payment.
• Qualify for each loan upfront and avoid refinance closing costs

With a VA one-time close construction loan, your loan officer will underwrite the entire loan upfront and then close the loan. This means that you only have to go through the mortgage process once and then can avoid having to go through another closing when construction is finished. The challenge is that not many lenders offer this product. Additionally, you will likely have a higher interest rate than qualifying for each loan individually.

Pathway Two: VA Construction Loan Refinanced into VA Loan

This pathway is more common than the first but can still be challenging to find. It allows for 100% financing on the construction of a primary residence. You will have to qualify for a separate VA loan at the end of construction. This will transfer your construction balance into standard mortgage payments.

The benefit of this option is using your VA home loan benefits for the construction loan. This means no down payment is required, and you'll have a lower interest rate than a conventional construction mortgage. The challenge is that not all VA lenders offer this option. Additionally, you will still need to go through two separate closings, which can add fees.

Pathway Three: Conventional Construction Loan Refinanced into VA Loan

This pathway is widely available from lenders across the United States. However, it requires the most upfront money. It begins with a non-VA construction loan which is then refinanced into a standard VA loan when construction is finished.

The downside is that you won't be able to take advantage of VA benefits. This means at least a 20% down payment on the construction phase. Additionally, conventional construction mortgages tend to have stricter qualification criteria. As a result, borrowers should only pursue this option if the prior two aren't available from lenders in their area.

This pathway begins with qualifying for a conventional construction loan. This is typically a 1-year loan with extension fees for delays. As construction happens, you will only need to make interest-only payments. You can refinance the loan into a standard VA mortgage when the construction is completed. However, this requires a home appraisal, and you'll need to ensure the newly built home meets VA requirements.

VA Construction Loan Lenders

Finding VA construction lenders in your area can be challenging. This is because it requires a specialized loan, and not all lenders offer it. Contacting your regional VA loan center is the best place to start your search. They can provide a list of lenders in your area that offer VA construction loans. However, you can also review the suggested lenders below.

BuildBuyRefi

• One-time close mortgage
• 100% Financing
• 620 minimum down payment
• 50 states availability

HomeBridge

• Begin with a construction loan
• Refinance into a VA loan

Comparing VA Construction Loans

The best way to find a great deal on a VA construction loan is to compare rates from multiple lenders. When comparing lenders, there are a few essential factors to consider:

VA Construction Loan Requirements

Service Requirements

To qualify for a VA construction loan, you must receive a Certificate of Eligibility (COE). To receive a COE, you must meet one of the following criteria:

• At least 90 days of active duty service.
• At least 181 days of active duty service during peacetime.
• At least six years of service in the Reserves or National Guard.
• The spouse of a military service member who either died in the line of duty or due to a disability related to their service.

Financial Requirements

Receiving a COE only provides you with access to the VA loan program. You must also qualify for the mortgage on top of that. Fortunately, VA loans have more relaxed financial requirements than conventional mortgages. Some of the requirements include the following:

• 620 minimum credit score
• 41% max debt-to-income
• 0% minimum down payment
• Two years of employment history

Property Requirements

The property you are building must be for your occupancy. You can't use a VA construction loan to buy an investment property or vacation home. In addition, the lot must be zoned for residential use and meet local VA requirements.

All new construction homes must have a foundation, framing, and roof. The home must also be connected to water, sewer, and electricity. These are known as minimum property requirements.

Starting on January 1, 2020, all counties are now exempt from the VA loan limits. However, those without full entitlement will have a limit. Previously, the maximum mortgage value was $510,400 in most counties.

Builder Requirements

The Department of Veterans Affairs also requires you to work with a VA-licensed and insured builder. In most cases, your lender will have a list of approved builders. Otherwise, your builder may require to get licensed through VA Form 26-421 or VA Form 8791. In most cases, you can't become your own builder.

Additionally, certain expenses are allowed to be covered by the mortgage payment. Typically, the Department of Veterans Affairs will not cover luxury items.

VA Construction Loan Process

You can begin applying for a VA construction loan if you meet eligibility requirements. The process involves many groups, including your lender, builder, and Department of Veterans Affairs. Due to the complexity, it's recommended to work with experienced professionals. Before you begin, ensure you receive a Certificate of Eligibility (COE).

• Get Pre-approved

  The first step is to get pre-approved for a VA construction loan. Their goal is to verify your eligibility and entitlement initially. You'll need to provide the lender with some financial and service information, including:

  • Your credit score
  • Income and employment information
  • Assets and debts
  • Certificate of Eligibility (COE)

  The lender will use this information to give you a loan estimate, which outlines the terms of your loan. As a result, getting pre-approved will calculate your construction budget.

• Choose a Builder

  Next, you'll need to find a VA-licensed builder. They must also have builder's insurance. Your lender will likely have a list of approved builders, but if not, you can use VA Form 26-421 or VA Form 8791 to get your builder licensed through the VA. Your builder will then need to draft construction plans. In most cases, you cannot act as your builder.

• Have Your Plans Appraised

  After you have chosen your builder, you'll need to have the plans appraised. An appraiser will be assigned to your project from a list of VA-approved appraisers. The appraiser's job is to ensure that the home will be worth at least as much as the loan amount when it is finished.

• Apply & Close Your Loan

  Now it's time to apply for your loan. You'll need to fill out a VA Loan Application and provide the following documentation:

  • Your pre-approval letter
  • Your Certificate of Eligibility (COE)
  • Construction plans and specifications
  • A copy of the builder's license
  • The appraiser's report
  • The estimate of construction costs

  After your loan application has been approved, you'll need to close on the loan. The closing process is similar to that of a traditional mortgage. You'll sign various loan documents and pay any closing costs.

• Disbursement of Funds

  After closing, the lender will release funds to pay your builder as work is completed. Depending on your lender, you'll need to make interest-only payments or nothing at all. The loan amount is typically disbursed in multiple installments, each covering a specific construction phase. For example, once your builder has laid the foundation, they'll receive another installment, known as a draw.

• Final VA Inspection

  Once construction is complete, a VA inspector will visit the property to verify that it has been built according to the plans and specifications. The inspector will also confirm that the home meets local building code requirements. Once the inspector verifies, you can transfer your construction balance to a regular VA loan. This means you will make monthly payments like a standard mortgage.

VA Construction Loan Alternatives

FHA Construction Loan

• Minimum Down Payment: 3.5%
• Credit Score Requirement: 580+

With this program, you can construct a home with only a small down payment. The loan will cover all construction costs; if you choose an FHA construction to permanent loan, your balance will automatically convert to a regular FHA mortgage when construction finishes. Individuals with lower credit scores are also eligible for these kinds of loans.

The drawbacks of this loan include many criteria and a maximum mortgage amount. The baseline FHA mortgage limit was $420,680 in 2022. However, this figure varies by location and the number of units you construct. A four-unit property will have a higher limit than a two-unit building.

USDA Construction Loan

• Minimum Down Payment: 0%
• Credit Score Requirement: 640+

The USDA construction loan is only available in some rural regions. This program has no down payment requirements, making it easier to qualify. However, you will need to prove that you have a steady income and can repay the loan. The median income determines loan limits in your area and the number of units you plan to build. You can view an eligibility map to see your regional limit.

Conventional Construction Loan

• Minimum Down Payment: 20%
• Credit Score Requirement: 620+

This type of loan is not backed by the government, meaning lenders require more financial stability. As a result, credit score and minimum down payment requirements are higher than other construction loans. However, conventional construction loans are widely offered by lenders.

Like other construction loans, the amount you can borrow is determined by the property's value. However, most lenders will only finance up to 80% of the appraised value or less. This means you will need a down payment of at least 20%.

FHA 203(k) Loan

• Minimum Down Payment: 3.5%
• Credit Score Requirement: 580+

The FHA 203(k) loan is a government-backed loan that can be used to finance the purchase and rehabilitation of a property. This loan is only available for properties that need significant work, such as a new roof or HVAC system. 203(k) loans have many of the exact requirements as other FHA loans. This includes a minimum credit score of 580 and a maximum debt-to-income ratio of 45%. However, you can qualify with a 500 credit score and 10% down payment.

Fannie Mae HomeStyle

• Minimum Down Payment: 3%
• Credit Score Requirement: 620+

Fannie Mae offers a construction loan that is very similar to a 203(k) loan. Borrowers can finance the purchase of a property and its rehabilitation costs with one mortgage. The HomeStyle loan has many of the same requirements as other Fannie Mae loans, such as a minimum credit score of 620. You will also need a down payment of at least 3%. One unique requirement of the HomeStyle loan is that you must occupy the property as your primary residence.

Home Equity Loans

• Minimum Down Payment: 0%
• Credit Score Requirement: 640+

A home equity loan is a second mortgage against your property. You can use the loan's proceeds to finance renovations or repairs. Home equity loans have shorter repayment terms than standard mortgages, but they also have higher interest rates. You will need at least 20% equity in your home to qualify for this loan.