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VA Construction Loans: What They Are and How They Work

The U.S. Department of Veterans Affairs (VA) offers VA construction loans to help current military service members, veterans and eligible spouses build the home of their dreams. While you won’t have to make a down payment, there are other qualification hoops to jump through.

What is a VA construction loan?

New construction loans are short-term mortgages designed to cover the cost of building a home. With a typical VA home loan, you receive a lump sum to buy an existing home. When you’re building a home, VA construction loan companies only disburse money on the portion of your home that’s completed.

Common features of VA construction loans include:

  • Payment of the loan proceeds in installments called “draws” as each phase of construction is finished
  • Ability to finance the costs of buying land and building the home
  • Option to choose from two different types of VA construction loans:
    • One-time close loan. You take out one loan that covers all of the construction costs, which then automatically converts to a regular or “permanent” you’ll have for the remainder of the loan term. This is typically referred to as a construction-to-permanent loan.
    • Two-time close loan. With this option, you close on two different loans. One loan is exclusively for the construction of the home. When the home is completed, a new loan is taken out to pay off the construction loan balance. The process is similar to a mortgage refinance.

What is the VA construction loan process?

The VA construction loan process is similar to a regular construction loan, with a few extra hurdles. The process typically follows these nine steps:

  1. step 1. Confirm VA loan eligibility. You can verify your eligibility by applying online for your Certificate of Eligibility, or filling out a VA form 26-1880 and sending it to the nearest regional VA office.
  2. step 2. Get approved for a VA home loan. Once you’ve found a lender who offers VA construction loans, you’ll need to meet VA guidelines and minimum mortgage requirements:
    • Credit score. There’s no VA-set minimum, but most lenders require a score of 620 or higher.
    • Residual income. Unique to VA loans, the residual income requirement measures how much take-home pay is left over after subtracting other monthly debts and home maintenance costs. It varies based on loan size, family size and the location of the home.
    • Debt-to-income ratio (DTI). Your DTI, or total monthly debt divided by gross monthly income, shouldn’t exceed 41% — still, you may be approved with a higher DTI ratio if you meet the residual income requirement.
    • Down payment. No down payment is required.
    • Occupancy. The home must be a primary residence.
  3. step 3. Submit construction plans and specs. The new home must meet minimum property requirements set by the VA. Your builder 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. step 4. Ask your builder to register with the VA. Once you choose a builder, the company must register with the VA and obtain a VA Builder ID number. The Veterans Information Portal provides a list of VA registered builders.
  5. step 5. Get a VA home appraisal. The VA loan process requires a VA home appraisal ordered through the VA. As long as the value is equal to or higher than the cost to build, you shouldn’t need a down payment.
  6. step 6. Ensure the builder receives funds as the home is built. A VA inspector confirms completion of each stage of construction and greenlights draw payments to the builder. Check in with your builder often to ensure those payments are made.
  7. step 7. Get VA property certification. The VA inspector must sign off on the property confirming that it meets VA minimum property requirements and local building code guidelines.
  8. step 8. Provide the VA with proof of warranties after construction. The VA requires either a one-year builder warranty or a 10-year insured protection plan for approval.
  9. step 9. Prepare for the permanent loan to kick in. If you have a one-time construction loan, the permanent loan payment schedule will begin automatically when the home is officially finished. The payment will be based on the full balance of the loan. With a two-time close, you’ll replace the construction loan with a new mortgage.
VA loan expert tips:
  • You can have more than one VA loan at a time. The maximum loan amount may be limited and a down payment could be required on a subsequent VA loan if you don’t pay off the existing one.
  • If you’re not ready to build yet, consider using your VA benefits to buy land. The land loan can be paid off later with a VA construction loan.
  • You may be approved if you have a DTI higher than 41%, as long as you meet the residual income requirements.

Pros and cons of a VA construction loan vs. a regular construction loan

Before you apply for a VA loan, weigh the advantages and disadvantages versus a regular construction loan.

Pros

  • No down payment is required.
  • Easier qualifying guidelines for income and credit history than other construction loans.
  • Veterans with a service-related disability may get the VA funding fee waived. The funding fee is an upfront, one-time fee charged to offset the costs of the VA loan program to taxpayers.
  • No mortgage insurance is required for VA loans.
  • You can use a VA loan for a new manufactured home purchase. The financing may cover the cost of having a manufactured home attached to your own plot of land.
  • VA closing costs and interest charges during the construction period can be rolled into the loan.

Cons

  • Not all VA-approved lenders offer VA construction loans.
  • Inspection time and VA form requirements may slow down the process.
  • VA appraisals may take longer and be more expensive than you’d otherwise encounter with a regular construction loan.
  • Because each construction draw requires inspection and recording fees, you’ll typically pay more for VA loan closing costs.
  • VA interest rates for construction loans may be higher because they require longer-term locks.
  • The funding fee may be as high as 3.6% of the loan amount for second-time VA home loan users.
 

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