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Updated on Friday, January 11, 2019
Ready to build your dream home? If you’re an active-duty service member or veteran of the U.S. Armed Forces, you may not realize that the Veterans Administration (VA) backs construction loans to help offset the costs of turning that house in your head into a reality.
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Jesse Gonzalez, broker of record at North Bay Capital in Santa Rosa, California, and member of the Veterans Association of Real Estate Professionals (VAREP), said these loans are relatively new and not well-known, even among active-duty service members. “There are not a lot of mortgage professionals doing these,” Gonzalez said. “My competition is sparse in this area because most mortgage professionals simply don’t understand it.”
But experts like Gonzalez say a VA construction loan is a fantastic resource for folks who want to build a home. Unlike conventional construction loans, VA construction loans offer a host of special benefits — from the possibility of 100% financing without a down payment to locked-in interest rates that won’t change over the years of the loan.
So, what do you need to know to take advantage of this resource? Do you need a special credit score or an approved contractor to build your new home? Let’s take a look at what you might need to do to get some help from the VA to build that house.
Qualifications for a VA construction loan
Much like VA loans designed to purchase an existing home, VA construction loans carry a number of eligibility criteria that lenders will look for before offering you this special type of mortgage.
Before you call a private lender (more on that later), take a look at some of the qualifications you’ll likely need to get one of these loans:
- Loans are open to veterans, active-duty military or eligible surviving spouses of members of the Armed Forces. You can check your eligibility on the VA’s website.
- Lenders require a Certificate of Eligibility (COE), a special form issued by the government to prove you’re eligible for a VA-backed loan.
Homes must be built by a licensed contractor (building it yourself or with relatives is typically not allowed).
- Homes must be built as a primary residence and occupied within 60 days of completion (exceptions are made for business units built on properties primarily intended for residential use).
- A minimum credit score of 620 is typically required, although some exceptions can be made.
Minimum property requirements for VA construction loans
Even if you and your home plans fit the bill for a VA construction loan, you should be prepared to jump through a number of hoops once you actually start construction.
Although the VA doesn’t put restrictions on the overall design of the house — whether you build a cute bungalow or a sprawling McMansion is up to you — if you’re going to build with a VA-backed loan footing the bill, your property will have to meet several requirements regarding usage, utilities and the like.
Some of the major things to be aware of include
- Usage — VA loans are intended to help people with housing, so it’s no surprise the VA construction loan requires the primary use be residential. Up to four units are allowed on certain properties, depending on size. Business units are allowed, provided they don’t “impair the residential character of the property,” according to VA rules, or exceed 25% of the gross floor area.
- Living space — The size of the living space must accommodate living, sleeping, cooking and dining space.
- Utilities — Water, sewer, gas and electricity must be available for the unit (or units, if there are multiple). Homes must have a means for safe sewage disposal, and connection to public sewerage is required, if it’s feasible.
Steps to getting a VA construction loan
If you’re interested in applying for a VA construction loan, a private lender may be able to help you, and some of the process will be similar to that of a conventional loan application.
- Certificate of Eligibility. This step is required only for VA-backed loans, not conventional loans, but it’s a must! To apply, you can fill out an online application, send in your documents by mail, or ask a lender for help.
- Prequalification. This is the first step of any loan process, and it will include a credit check as well as the need to provide the COE, income documents, and possibly proof of other assets. You may also be asked to undergo the following:
- Builder registration. This is a review of your chosen contractor to ensure it’s reputable and up to the task.
- Deal calculation. This number crunching will be done by the lender as he or she figures out a total loan amount that includes any closing costs, seller or building concessions, interest and more.
- Underwriting. This is step two of the process. Your lender will submit the loan for review. As with conventional loans, the underwriter will look at your income, credit, assets and construction plans. Information to verify your debt-to-income (DTI) ratio may also be requested by some lenders. In the case of a VA construction loan, the underwriter also will look to see that your builder is approved by the VA.
- Closing. VA construction loans allow for something called a “one-time close.” While traditional building loans usually require the borrower take out and refinance a construction loan as a permanent home loan once construction is complete, VA borrowers get to skip that second step. Instead, there’s a single closing, at which time the borrower and lender sign all necessary paperwork and money is handed over so that construction can begin. The builder will use the money to build, but payback of the loan won’t begin until construction is complete.
Pros of a VA construction loan
Why would you want to get a VA construction loan, if you’re eligible, when you could just buy an existing home?
According to Evan Wade, co-founder and partner of Philadelphia Mortgage Brokers in Philadelphia and member of the Association of Independent Mortgage Experts (AIME), VA construction loans are especially popular in areas with limited housing inventory.
“The VA does not wish to restrict the type of homes a veteran is able to buy,” Wade explained. “If a veteran wishes to construct a brand new house while still being able to utilize their hard-earned benefits, they should definitely be able to do so.”
The benefits don’t stop there. A construction loan could allow the freedom to design a home that truly suits your and your family’s needs, instead of making do with a home that’s simply “almost right.” Here are some other benefits for which you might qualify with a VA construction loan:
- Lower interest rates
- Skipping a down payment
- Avoiding Private Mortgage Insurance (PMI), which typically is not required
Cons of a VA construction loan
There are, of course, some aspects of a VA construction loan that might not make it a perfect fit. Before you approach a lender, you might want to take the following into consideration:
- VA construction loans require builders be approved by the VA. That means you can’t build your home yourself or use friends and family helpers to cut construction costs.
- Some building styles are banned under this construction loan, such as a tiny house.
- Not all lenders, even lenders who offer VA loans, provide VA construction loans.
Where can you find a VA construction loan?
It can be tough to find a lender who is versed in VA construction loans; however, they are out there. Asking friends or family who are also in the military world for word-of-mouth recommendations can be a great way to find the perfect lender who can walk you through the process.
VAREP also offers a “find a member” option on its website to assist in locating military-friendly mortgage professionals located around the U.S.
Before you borrow
When it comes to building a home, the VA construction loan is a valuable option for would-be homeowners who qualify. If you’re not sure one is right for you, you might also want to consider a traditional construction loan.