VA Loan for New Construction
Although loans backed by the U.S. Department of Veterans Affairs (VA) are most commonly used to purchase existing homes, eligible veterans and active-duty service members can also use their VA home loan benefits to finance the construction of a new primary residence. The VA offers construction loans specifically for this purpose.
- A VA loan for new construction could be an excellent option if you’re a veteran or active-duty service member wishing to build a new home.
- Borrowers can take advantage of several VA construction loan benefits, such as having no down payment or mortgage insurance requirements.
- To get approved for this type of VA loan, you will need to find a VA-approved lender, contract with a builder who understands the VA’s requirements, and meet other requirements established by the VA.
VA loans for new construction offer several advantages, including no down payment requirements. However, the loan cannot be used to purchase land unless construction begins right away. Veterans Guide outlines the key information you need to know before applying.
Can I Use a VA Loan for New Construction?
In addition to the more common VA loans used to purchase existing homes, the U.S. Department of Veterans Affairs also offers loans for new construction. Like other VA-backed home loans, these come with specific eligibility requirements.
A VA construction loan can be used to finance the building of a single-family home that will serve as your primary residence. It may also cover the cost of purchasing the land or lot, provided construction begins right away. However, loan funds generally cannot be used to pay for closing costs or appraisal fees.
To qualify for a VA construction loan, you will begin by getting a Certificate of Eligibility (COE). A COE proves that you meet the service requirements for this VA benefit, such as having at least 24 months of continuous service, being on active duty for 90 days, or being discharged with a service-connected disability. You can apply for a COE using VA Form 26-1880.
You will also need to show that you can handle your financial obligations. While the VA sets no minimum credit score for a loan, most lenders require a score of at least 620. You will also need a debt-to-income, or DTI, ratio of 41% or less to qualify for most VA loans.
How Does a VA Construction Loan Work?
VA construction loans are considered short-term loans meant to cover the cost of your new home construction. When you choose to finance building a new home through the VA, it’s usually a two-step process.
First, you take out a VA construction loan, which typically has a term of six to 12 months. The funds are held in escrow and disbursed to the builder as predetermined milestones are reached.
Once the home is built, you can transition to a traditional VA loan. The new loan pays off your construction loan and allows you to finance the amount you owe over the loan’s term, which is usually 15 or 30 years.
VA construction loans generally don’t require a down payment, but you may be subject to certain limits. VA construction loan limits are the maximum amount the VA will guarantee for eligible veterans based on location and the borrower’s entitlement. Fortunately, VA home loans no longer have limits if the veteran has full entitlement.
Challenges of Using a VA Loan for New Construction
If the idea of building the home of your dreams sounds enticing, you may wonder if VA construction loans are hard to get. Unfortunately, there are a few challenges applicants face when using these types of loans.
- Finding a builder: While the VA no longer requires a Builder ID, you must find a builder who agrees to meet the VA’s construction loan requirements.
- Construction loan complexities: The VA loan’s new construction requirements can be complex and confusing, so they may be difficult for applicants to understand or get approval.
- Time constraints: This is considered a short-term loan, meaning that if the build is delayed, there could be issues associated with your loan.
- Costs associated with construction: You are responsible for making sure your new construction project stays within budget and may need to pay additional loan-related costs, such as VA appraisal fees.
VA Loan for New Construction vs. Conventional Construction Loans
Unless you’re paying cash for your project, you’ll need a construction loan to pay for the materials, labor, and land in many cases. While the VA offers a loan for new construction, you can get these types of loans from conventional lenders as well. What’s the difference between the two?
VA home loans usually don’t require down payments. This is a huge advantage over conventional loans, where a down payment of up to 20% may be necessary. You avoid paying for PMI with a VA loan, which can potentially save hundreds monthly compared to a conventional mortgage. VA borrowers may also take advantage of capped, competitive interest rates, which isn’t the case with standard loans.
One of the most significant advantages is the flexibility of VA loans if you have challenging or bad credit. In general, VA loans have greater allowances for credit scores and income requirements than conventional loans.
New Construction FAQs
Can I Build a New Home With a VA Loan on Any Type of Land?
VA construction loans can be used to buy land to build a primary residence. However, they cannot be used to purchase raw land for investment or hunting. If you use a portion of your loan to pay for land, you must begin to build your home on it immediately.
Do I Need To Find a Builder Before Applying for a VA Construction Loan?
Yes, it’s recommended to find a builder before you apply for a VA construction loan. While a VA Builder ID is no longer required, you must find a licensed and insured builder with an understanding of VA requirements and your particular needs.
How Long Does the Construction Loan Process Take, and When Do I Start Paying the Mortgage?
The VA construction loan process takes anywhere from 45 to 60 days to complete, and the money goes into an escrow account, which is disbursed as project benchmarks are met. However, you aren’t required to begin repaying the loan until construction is completed on the home.
Can I Use a VA Loan To Build a Home in a Rural Area?
Yes, you can use a VA loan to build a home in a rural area as well as construct a farm residence that you intend to occupy. However, a VA-guaranteed loan will not cover the non-residential value of farmland in excess of the home site.
What if My Construction Project Goes Over Budget? Can I Get More Funding?
It’s not uncommon for construction projects to go over budget. If you have full entitlement, you don’t have any loan limits and can borrow additional funds as long as the lender approves it. If you have a reduced entitlement or the lender won’t approve additional funds, you will be required to pay the difference.
Build Your Dream Home With a VA Loan
VA new construction loans are an excellent option for veterans who want to build a new home with no down payment, no PMI, and lower interest rates. However, because there are different types of new construction loans and the requirements can change, applying for this valuable benefit can be confusing.
Contact Veterans Guide today for assistance in confirming your eligibility for one of these loans and guidance through the process of applying for a VA construction loan to build your dream home.
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