VA Construction Loans: Construction Lending for Veterans

A VA construction loan is a type of loan program offered to eligible veterans, active-duty military members, and qualifying surviving spouses looking to build a new home.

When most people think of VA loans, they imagine VA home or mortgage loans, which offer assistance in buying an existing home. But what if you want to build your own dream home? In that case, construction loans for veterans can be an essential resource.

In this guide, we’re going over everything you’ll need to know about VA construction loans as well as how to find VA construction loan lenders.

How Does a VA Construction Loan Works?

VA construction loans are designed to help veterans finance the construction of a new home. For the most part, VA construction loans work similarly to conventional construction loans. The main difference is that the former features a number of benefits that can make the process easier and more affordable.

VA construction loans are partially guaranteed by the U.S. Department of Veterans Affairs (VA). You can access these loans through a network of private lenders. We recommend doing your research to find and compare VA construction loan lenders with National.

VA construction loans include a number of benefits, such as lower interest rates, lower down payments, and more flexible lending requirements.

A VA new construction loan also gives you the option to combine both the financing for the construction phase and the long-term mortgage into a single loan. In other words, you don’t need to obtain separate loans for construction and permanent financing. The process can be simplified, and you may even be able to save on closing costs.

Pros and Cons of Acquiring VA Construction Loans

VA construction loans can offer a number of benefits to veterans looking to build their dream homes.

Let’s take a look at the different pros and cons of this type of financing.

Loan Amount, Terms, and Interest Rates Explained

Va construction loans are popular because of the numerous benefits they offer, specifically when it comes to funding amounts, terms, and VA construction loan rates. Here’s a glimpse of what you can expect with these funding solutions.

Interest Rates

VA construction loan rates are known to be substantially more competitive than the average rates on traditional construction loans.

Loan Amount Range

When it comes to funding amounts, there are no set VA construction loan limits. However, the loan amount you receive will depend on your own individual qualifications, such as your credit score, as well as the lender you’re working with.

Terms

Like traditional construction loans and mortgages, VA construction loans are long-term. Repayment terms are typically between 15 to 30 years.

Rules and Limitations of Obtaining a VA Construction Loan

There are a host of VA construction loan rules you’ll need to follow if you plan on taking advantage of the benefits these loans have to offer. Take a look at some key considerations.

• Eligibility: Only qualified veterans, active-duty service members, surviving spouses of a veteran, and borrowers that meet the VA lending requirements are able to obtain this type of funding.
• VA-Approved Builders: Although you have the freedom to work with any builder you choose, they will need to be approved by the VA.
• VA-Approved Lots: The land you’re intending to purchase must meet the VA’s requirements – such as access to utilities, compliance with local zoning regulations, and suitability for residential construction. You also won’t be able to buy land outside of U.S. territories.
• Primary Residence: You can’t use construction loans for veterans to build a vacation home or an investment property.
• Construction Plans: You’ll have to provide detailed construction plans for approval. Once construction is complete, the VA will inspect your residence to ensure it has met all of the requirements and that designs have not swayed far from the original planning.

VA Construction Loan vs. Traditional Mortgage

A VA construction loan and a traditional mortgage can both help you achieve your goal of homeownership. Nevertheless, there are some key differences between the two. Let’s break them down:

Qualifications Explained

Take a look at the most important VA construction loan requirements.

VA-Specific Requirements

The VA sets out a list of specific requirements you’ll need to meet in order to obtain funding. You can apply for a Certificate of Eligibility (COE) to demonstrate your eligibility. For the most part, you’ll have to prove that you’re one of the following:

• Qualifying veteran
• Active-duty service member of at least 90 days
• Member of the Reserve and National Guard
• Eligible surviving spouse

Veterans that have served between 1990 and now must be able to meet at least one of the following conditions.

• Having served for a minimum of 24 consecutive months.
• Completed the period to which you were called or ordered to active duty, provided it was at least 90 days.
• Served for a minimum of 90 days if you were honorably discharged
• Less than 90 days of service if you were discharged due to a service-connected disability

Lender-Specific Requirements

On top of the requirements set out by the VA, borrowers will need to meet lender-specific requirements.

• Credit Score: Although the VA doesn’t set credit score requirements, candidates will have an easier time obtaining a loan by maintaining a good credit score, generally around 580 or higher.
• Debt-to-Income Ratio (DTI): The VA typically requires a DTI ratio of 41% or lower. Nevertheless, individual VA construction loan lenders may be more or less rigid, depending on your financial qualifications.
• Income Requirements: Most lenders don’t impose income requirements to secure this type of loan. Still, your annual income should make sense for the type of loan you’re looking to obtain. As a general rule, aim to spend no more than 25% of your take home pay on housing costs.

VA Construction Loan: Step-by-Step Application Process

The process for obtaining a VA construction loan is slightly different from other types of loans. This is because you’ll need to follow extra steps and rules outlined by the VA. Here’s what you can expect the loan application process to look like.

1. Get a Certificate Of Eligibility (COE) – The first thing you should do before applying for any type of VA financing is to get a COE. This document asserts that you are either an active-duty member or a veteran of the U.S. military that has met the minimum service requirements – or that you’re a qualifying surviving spouse. You can find information on how to request a COE from the VA here.
2. Research VA Construction Loan Lenders – Not all lenders provide this type of loan, which is why you’ll need to do your research to find a lender experienced with VA loans. Once you have settled on a lender, focus on getting a pre-approval to understand the type of property you can afford. It may also be helpful to shop around and compare interest rates to ensure that you’re getting the best possible terms. National is a great resource for comparing different loan options from various lenders and selecting the best fit.
3. Find a VA-Approved Builder or Contractor – Aim to work with a builder that is both knowledgeable about the VA’s requirements and willing to work within its guidelines. The VA does not keep a list of approved builders. Instead, your builder will need to register with the VA independently. You can learn more about the process here. Once you have settled on a builder you’ll need to work together to develop detailed construction plans and outline cost estimates. These will also need to be VA for approval.
4. Apply for the Loan – Make sure to carefully follow your lender’s application instructions and double-check any documents before submitting them. You may be asked to provide your COE, tax returns, bank statements, and construction plans – along with other documents. At this point, you may also be required to obtain a VA home appraisal.
5. Close on Your Loan – Once your loan is approved and you receive your funds, your builder will be able to start to work on your new home! Keep in mind that they’ll need to follow the approved construction plans. After the construction phase is completed, expect to complete a VA inspection to ensure you’ve followed through on approved plans.

At this point, you may choose to convert your VA construction loan into a permanent VA home loan.

What Are the Alternative Loan Options to VA Construction Loans?

While VA construction loans are an attractive financing solution, they may not be the best fit for everyone. If you don’t qualify for this type of financing or if you’re looking to avoid VA rules and restrictions, it may be worthwhile to consider more traditional forms of financing.