VA construction loans: Step-by-step guide
A VA loan is a loan that is guaranteed by United States Department of Veterans Affairs (VA). It is commonly used to buy a house. However, this type of mortgage can also serve as a loan to veterans who are building or renovating homes. Although not all VA lenders offer construction loans however, there are many steps involved in obtaining a VA home construction loan. Here’s what you can expect.
What is a VA loan for construction?
A VA loan is available to veterans and military personnel who are eligible. You can use the loan as a construction loan for land purchase and building a new home. The loan can also be used to buy an existing house and make it your own.
For veterans and military service personnel who meet the minimum service requirements (more on this next), a VA loan for home construction can be approved with a credit score as low at 640 and a higher level of debt than a conventional loan.
Many people are exempted from paying the VA financing fee. This is a requirement for VA loans. Jerry Thomas, a Cranbrook Loans construction loan officer, specializes in VA and FHA loans in Clinton Township. According to Thomas, veterans who have received VA disability income are exempted.
Contrary to a VA loan to purchase a home, but similar to other construction loans a VA loan is for land and construction. The loan is paid in monthly installments once the various milestones of the project have been met. The funds are placed in a draw account for payment to the builder as part of the construction process. While requirements may vary from lender-to-lender, it is common for the lender to get the borrower’s permission as construction phases are complete. Then, the next payment will be released to the builder.
VA construction loan requirements
The VA won’t support loans, regardless of whether they are for new homes or construction. To be eligible for service, you must fulfill certain conditions. They will vary depending upon when you are served.
VA home construction loans are available to active-duty military personnel who have completed 90 consecutive days.
These eligibility requirements can be met by veterans who served in the 1990s and now.
- Minimum of 24 consecutive months of service
- The entire time you were called/ordered into active duty, assuming that it was at least 90 Days
- If you were fired for hardship or reduction in force, at least 90 days
- You will be discharged within 90 days if your disability is service-connected
If you served more time in the past few decades, please visit the VA eligibility page to determine the category that will apply to you. The appropriate dropdown will display your minimum service requirements.
Good news: You won’t have to pay any VA construction loan limit if your qualifications are met.
How to get a VA Construction Loan
Your Certificate of Eligibility (COE) is the first step in securing a VA-construction loan. This is proof that you meet the minimum service requirements in order to be eligible for a VA Loan.
The VA eBenefits portal allows you to apply online for your COE. For veterans, your DD214 papers will be required. For active-duty service members, you will need a statement signed by your personnel officer.
Preapproval from a lender
The VA won’t lend you money directly. Instead, the VA will help you apply to a bank, credit union, or another lender that offers VA loans. Even if a lender offers VA purchase loans, it may be difficult to get a VA construction loan.
Thomas recommends having a conversation to the loan officer about your project and your qualifications. “Examine your credit and income with the loan officer. To discuss the program, connect your mortgage loan officer to your builder.
If you are fortunate enough to have a lender available, ensure that you are preapproved for the loan. The following documents are essential:
- Your COE
- Pay stubs
- Federal tax returns for the last two years
- Statements from the bank
- Statements from any investment account or retirement account
- Driver’s license, or any other photo ID
- Settlement statement, survey and deed to land (if you own the land).
- If you haven’t yet bought the land, you will need to sign a purchase agreement.
- With the builder, construction contract
- A registered builder is recommended
A VA-registered licensed and insurance builder is required to be eligible for a VA construction loan. You cannot be considered the builder. Your lender may have a list or possibly require that your builder register with the VA.
Thomas states that this program holds the builder accountable to completing the project on schedule and within budget. “Not every builder will accept the VA terms.”
Through the Veterans Information Portal, you can search for a VA registered builder. You can search for a VA-registered builder by visiting the Veterans Information Portal.
- Information and certifications for builders
- VA Form 26-421
- VA Form 8791
- Submit project plans
After your builder is registered you must submit the plans of construction to your VA home loan lender. You must provide documentation from your builder that describes the building materials, lot and future home site.
Thomas says that before you can apply to a VA construction loan you will need your land information — either the purchase agreement or the deed if the land is already yours. The survey, contract, plans and specifications for your home are also helpful.
Get a home appraisal
Also, you will need to obtain a VA home appraiser. This appraisal will be based upon the plans. Thomas recommends sticking with plans and designs that comply with the standards of the area to ensure your home is eligible for a zero-down loan.
Your appraisal might be reduced if your house plan is unusual or grand compared to the neighboring homes.
Close the loan
A VA home construction loan can take as long as 45 to 60 days to process due to the additional paperwork that must be completed. You may need to inform the seller if you are purchasing land with a VA loan for land or construction.
You will have to pay the funding fee (the VA’s mortgage insurance) if you are obligated to.
Based on the project’s timeline, funds will be disbursed once the loan has closed. At closing, you may only receive the amount required to complete the lot purchase. Your builder might receive a 10% advance. The remaining loan balance goes into an escrow account or draw to be drawn down over time as construction milestones are met.
Final VA inspection
You will need to get a final VA inspection after construction is complete to confirm that the home was built according the original plans. The final inspection will be completed. The loan will then become a permanent VA Loan.
What can I build using a VA Construction Loan?
This is more dependent on the requirements of VA than your lender. VA guidance is most relevant for this type of construction loan. This guidance comes into play during the initial project plan appraisal as well as the final inspection. No limits are placed on new VA construction loan loans after 2020. This means that you can technically go as large as you wish.
However, your lender wants you to prove that the loan is a good fit. Your lender won’t permit you to overbuild in your area.
They might also require you to specify the type and size of house you are allowed to build. A VA home construction loan is unlikely to be granted by many lenders for a mobile/manufactured house.
What are the pros and cons about VA construction loans?
There are many advantages to getting a VA loan for construction and land.
- No down payment
- Higher interest rates and terms than traditional loans
- Regular mortgages have lower closing costs
- No need for mortgage insurance
- No VA construction loan limits
However, there are some drawbacks.
- Veteran veterans must obtain their COE.
- Find a builder who is willing to work with the VA, and a lender who will.
- Because they are forced to adhere to a strict timeline, some builders won’t accept VA loan projects.
- You will add additional work to an already stressful project (building new homes), by having the VA and its extra steps involved in the process.
Find a VA construction loan lender
Finding a bank that offers VA construction loans can prove difficult. It is rare for lenders to offer construction loans. Of those that do, only a few provide FHA or VA loans. The U.S. Department of Veterans Affairs had limited guidance regarding construction loans until 2018. So, the few lenders that were allowed to do these loans didn’t have much to go on.
It is best to locate a lender who offers VA loans in your area. Bankrate allows you to quickly find estimated VA loan amounts. You should speak with a loan officer to learn more about your specific project as not all VA lenders will offer construction loans. Be sure to complete all paperwork before getting preapproved by a lender.