How Does a VA Construction Loan Work?
A VA construction loan can help eligible military borrowers build a home on land they already own or want to buy — with as little as no money down. Learn about the loan process and requirements for this type of financing below.
- VA construction loans are available to active-duty military members, veterans and surviving spouses.
- Borrowers are required to work with an approved VA construction loan lender and builder.
- Your construction funds will be paid out in stages versus all at once.
How does a VA construction loan work?
A VA construction loan is similar to a traditional VA loan in that it generally doesn’t require a down payment — plus, you won’t need to pay for mortgage insurance either. Further, a main difference between construction loans and regular purchase loans is that the funds aren’t all paid out at once. Instead, the builder receives periodic “draw payments” at different stages of construction. You may not have to make payments on your loan until the construction is done.
There are two main types of VA construction loans to choose from:
- VA one-time close construction loan: Also called a single-close construction loan, a one-time close loan covers all of your construction costs, then automatically converts to a “permanent” mortgage once the build is complete. Your lender will adjust your loan’s amortization schedule to fit within the remaining repayment term. For example, if you have a 30-year mortgage and construction takes 12 months, you have to fully repay the loan in 29 years.
- VA two-time close construction loan: In this type of transaction, you’ll use two different loans. The first loan will cover the construction costs; once that’s over, you’ll take out another loan to replace the construction loan.
You can use a VA construction loan to finance a home construction, a land purchase or both. VA construction loans are only available for single-family homes — you can’t use them to finance an investment property.
Pros and cons of VA construction loans
Pros
- You may not need a down payment. Like traditional VA home loans, VA construction loans generally don’t require a down payment.
- You could qualify with a lower credit score. Though many VA lenders prefer a 620 credit score or higher, you may find some that accept lower scores.
- You won’t have to pay mortgage insurance. Unlike conventional loans, you won’t need to pay private mortgage insurance when you put down less than 20%.
Cons
- Only available to military members. VA construction loans are designed specifically for eligible military borrowers. If you’re not affiliated with the military, you’ll need to consider other loan types, like conventional or FHA loans.
- You’ll need to pay the VA funding fee. Unless you qualify for an exemption, you’re required to pay the VA funding fee. This fee ranges from 0.5% to 3.3% of your loan amount.
- Restrictions on property type. VA construction loans are only available for the construction of single-family residences.
VA construction loan requirements
VA funding fee
One of the main VA loan requirements for VA loans is the VA funding fee. Unless exempt, you’ll have to pay this fee before construction begins.
Down payment
The VA itself doesn’t impose a down payment requirement. However, you may need one for some lenders, especially if you already have an existing VA home loan.
Proof of income
You’ll need to submit proof that you earn sufficient income to cover your mortgage payments and other living expenses. Lenders will review your employment information — they prefer to see a minimum of two years of employment history with the same company.
Credit score
The VA doesn’t set a minimum credit score requirement — it lets lenders decide. Many VA lenders prefer at least a 620 score. You’ll get a better VA loan rate with a higher credit score.
Don’t know your credit score? Get your free score on LendingTree Spring today.
Debt-to-income ratio
Many VA construction loan lenders require a maximum 41% debt-to-income (DTI) ratio. That means the cost of your monthly debts (like loan and credit card payments) can’t exceed 41% of your monthly income.
Appraisal
You’ll have to get a VA-approved appraiser to say that the after-construction value of the property aligns with the loan amount. VA appraisal fees can vary by location. Visit VA.gov for a list of state-by-state fees.
Closing costs
You’ll still have to pay closing costs, but there’s a cap on VA origination fees that helps keep costs manageable. The origination fee can’t exceed 1% of the loan amount.
How to get a VA construction loan
1. Verify your eligibility
You can verify your eligibility by applying online for your certificate of eligibility (COE) or filling out a VA Form 26-1880 and sending it to the nearest regional VA office.
2. Compare VA-approved lenders
You’ll need to work with a VA-approved mortgage lender to get a construction loan. Shopping around and comparing rates with multiple lenders can save you more than $80,000 over the life of a 30-year mortgage, according to a LendingTree analysis.
3. Find a builder and submit construction plans
Choosing the right builder involves thoroughly researching any builder you’re considering. Your local homebuilders’ association should have a list of builders for you to look into. Be sure to check references, read reviews and look at past building projects.
Once you choose a builder, they should fill out Form 26-1852 with a description of all of the building materials and submit it (along with a copy of the building plans) for approval.
4. Close on the loan
You’ll close on a construction loan before construction starts. You’ll receive an initial disbursement and the rest will be put into an escrow account, also known as a draw account.
5. Complete construction
Once you’ve closed on the loan, construction can begin. Keep in mind, though, that your construction project could take a year or more to complete.
Frequently asked questions
VA construction loans are available through several banks and financial companies, including:
- Veterans United Home Loans
- First Federal Bank
- SunWest Mortgage Company
Yes, a VA construction loan can cover new construction of single-family homes.
There isn’t a set maximum for VA construction loans since it depends on your VA entitlement and local conforming loan limits.
No, down payments aren’t usually required for VA loans or VA construction loans.
A VA construction loan generally takes up to 60 days to close.
The VA doesn’t impose a set credit score requirement, so technically, there’s no minimum credit score needed to get a VA construction loan. That said, individual lenders may impose their own requirements. Most of the time, VA lenders like to see at least a 620 score.
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