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Published: Jan 24, 2024 7 min read

A VA construction loan is a financing option that helps eligible service members build their ideal home. Like any loan, you’ll need to know the ins and outs of the borrowing process and qualification requirements before you can construct your dream home.

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What is a VA construction loan?

A VA construction loan is a short-term mortgage option that combines the benefits of a VA loan with the flexibility of construction financing. Eligible veterans and service members can use a construction loan to secure funding to purchase land, build a residence and cover construction-related expenses.

How do VA construction loans work?

Rather than providing one upfront payment, a VA construction loan pays for the completed parts of the home you’re building. These loans combine financing for both the land purchase and construction costs into a single package. The Department of Veterans Affairs guarantees a portion of the loan, providing favorable terms such as low or no down payment and competitive interest rates.

The construction process typically involves a phased disbursement of funds, with the builder receiving payments at various stages of completion. You must transition the loan into a permanent mortgage once construction is complete.

One hurdle you may have to overcome is finding VA-approved lenders and builders, which can be difficult because VA construction loans are not very common.

Eligibility requirements for a VA construction loan

The VA construction loan application process is more complicated and involves more paperwork than a VA purchase loan. You must be a qualifying U.S. military veteran, active-duty service member or a surviving spouse, which you’ll prove with your Certificate of Eligibility (COE).

Your newly constructed home must be your primary residence, so you have to live there more than six months out of the year. As with any loan, you will need to provide documentation including proof of income, credit history, your credit score (ideally at least 620) and a debt-to-income ratio of 41% or less.

Be aware that it can be difficult to find VA construction loan lenders as this kind of loan is a less used type of financing. Some lenders may require a down payment. There are specific rules as well, including a VA-approved builder, although you can also submit any builder you want for VA approval. ‘

Types of VA construction loans

Single-close loan (construction to permanent): Single-close construction loans, aka one-time close construction loans, allow you to finance the cost of the lot, construction and your mortgage with one loan. Once your project is complete, this kind of loan converts to a permanent mortgage, so you only need to do closing paperwork and pay closing costs once.

Two-time close loan (construction only): With a two-time close loan, only the cost of construction is covered. When the project is complete, you have to take out another loan, which means you’ll go through the loan approval and closing process twice.

Who offers VA construction loans?

Finding a lender who offers VA construction loans is more challenging than with other kinds of loans. Even lenders who offer other types of VA loans, like a purchase loan, may not offer construction loans. You can search for lenders in your area through the VA’s website, and your local Regional Loan Center can answer any questions you have on weekdays between 8 a.m. and 6 p.m. ET.

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The advantages of a VA construction loan

With a VA construction loan, eligible borrowers can get the benefits of VA purchase loans, like no money down, as well as the convenience of a single-close transaction. As with VA purchase loans, eligibility criteria are more lenient than conventional loans, making it easier to secure financing.

The flexibility of VA construction loans accommodates various projects, from building a new home to renovating an existing one. These loans often feature lower interest rates compared to conventional construction loans, which can translate to cost savings over the loan term.

How to get a VA construction loan

1. Research lenders that offer VA construction loans

While fewer VA lenders offer construction loans compared to other VA loans, there are a few major ones that will work with construction loan borrowers. See the VA’s approved lenders to find potential options.

2. Get a pre-approval offer

At this stage, you’ll work with your lender to figure out whether you need a one-time or two-time close construction loan.

3. Plan with a VA-approved builder

You can only use VA-approved contractors to build your home project. Your contractor will work with you to draw up construction plans to give to your lender for approval.

4. Submit a completed VA construction loan application

Present your documentation, including your COE, to your lender, who will tell you whether you meet qualification requirements.

5. Go through the appraisal and approval process

The lender will send an appraiser to assess the property and building plans for your construction project.

6. Close the loan and begin construction

Review the terms of your loan agreement and pay any closing costs, like the required one-time funding fee and appraisal costs. This can take a bit longer than closing a purchase loan, typically 45 to 60 days, due to the additional paperwork involved with construction loans. Depending on which type of construction loan you choose, this may be the first of two closing processes you go through.

You’ll receive the funding in phases as you build your home project. The amounts you receive, and when you receive them, will depend on the terms of your loan. Your lender will put your money in a holding account as you complete your project timeline.

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Summary of VA Construction Loan Guide

VA construction loans can help qualifying veterans, active duty service members and spouses build their dream homes. These loans provide financing for both the construction of a home and the land it’s built on. Depending on which option you choose, you may be able to convert your loan into a permanent mortgage once your project is complete. Keep in mind: While VA construction loans offer competitive interest rates and more lax lending criteria, they’re not as commonly used as traditional home loans, which can make finding a lender more difficult.

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