VA Construction Loans: A Step-by-Step Guide

If you’re a service member, veteran, or eligible spouse, you may know that the U.S. Department of Veterans Affairs (VA) can help you buy an existing home. But did you know the VA can also help you build a home?

VA home loans are offered by private lenders, but partially guaranteed by the VA. This guarantee makes them a safe bet for lenders, and that means they can offer you better terms. You may be able to buy a home without a down payment, and you’ll get a competitive interest rate with limited closing costs. You’ll also save by not having to pay PMI (private mortgage insurance).

So what if you’d rather build a home than buy an existing one? In many cases, you can still use a VA home loan. The VA construction loan program lets you finance the construction of your home, then convert the loan to a regular mortgage once it is built.

Taking advantage of a VA construction loan requires careful planning and a lot of paperwork. Make sure you choose experienced, knowledgeable professionals to work with; they will help to ensure that all of the necessary steps are completed in order and on time. Below you will find an introduction to the process of securing your VA loan and building your home.

1. Get your documentation in order.

To make sure you are qualified for a loan, your lender will require you to provide documentation. This may include your credit history, proof of income and other financial documents, like tax returns and bank statements.

You will also need to prove that you are an eligible service member, veteran or family member. To do so, you will need a certificate of eligibility (COE). You can go to the VA website to determine your eligibility and request a COE.

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2. Find a lender that offers VA construction loans.

Most lenders don’t offer VA construction loans, so the first step is to find a lender who does.  Shop around, since interest rates, fees, and customer service can all vary. So will the lenders’ credit score requirements and other criteria.

Interest rates are particularly important over the long term, since a small difference in the rate can add up to a big difference in the amount you pay over the life of the loan. Fees are important in the short term because they help determine how much cash you need on hand for the purchase.

Make sure to choose a knowledgeable lender who is experienced and can communicate clearly. The construction loan process can be complicated, and you will benefit from the guidance of someone who has dealt with many similar situations.

3. Get preapproved for a loan.

Once you have provided all the necessary information and the lender is satisfied with such measures as your credit score and your debt-to-income ratio, they will pre-approve you for a loan. Your preapproval will help you determine how much of a home you can afford to build. It may also list other criteria that your plans will have to meet.

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4. Choose an approved builder.

You will need to select a builder that is registered with the VA in order to qualify for a VA loan. You can look up a builder through the VA website. Alternatively, if your preferred builder is not registered, they can follow a simple process to get their registration in as little as five days.

It is important to understand that the VA does not evaluate and approve builders — it only registers them. You will need to do your own research to make sure you choose a reputable builder.

While the VA merely maintains a registry, your lender may have specific criteria or processes for approving builders. Work with your lender to make sure you are choosing a reliable, qualified builder.

5. Make plans.

Once you are preapproved and you’ve chosen your builder, it is time to collaborate with that builder to plan the construction. This planning process may result in building plans or blueprints, cost estimates, and a timeline.

Your lender will need access to your building plans before you close on the loan.

6. Get an appraisal.

Your lender will request a VA appraisal based on your plans and specifications, and the VA will issue a Notice of Value.

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7. Close on the loan.

After your plans have been approved, your lender will set a closing date, which may be 45–60 days out. On closing day you will sign a lot of paperwork, make any down payment, and pay any closing fees. The loan amount will go into an escrow account from which it can be disbursed gradually at different steps of your building project.

VA construction loans operate as construction-to-permanent loans in a couple of ways. With a one-time close loan — which many lenders recommend — the construction loan and the permanent financing are both handled at the same time. Your lender will modify your loan at the end of the project from a short-term construction loan to a long-term mortgage.

With a two-time close, there will be one loan to cover the construction (with non-VA funding) and a VA loan after construction to take out or replace the first loan. After you close on your VA loan, you will have to pay the VA funding fee (unless you are exempt; ask your lender).

8. Build the home.

During construction, your builder will handle payments that arise, such as inspection fees, title fees, and property taxes. Your lender will make payments to the builder as various milestones are reached.

9. Get a final inspection or appraisal.

The final inspection may be completed by the original appraiser. It confirms that the home meets the VA’s Minimum Property Requirements and that it conforms to the plans and specifications.

The final step will depend on whether you have a one-time close or two-time close loan. For a one-time close, you will have your final inspection and the project will be done. Your lender will modify your loan to a long-term home loan.

If you have a two-time close, the lender will have to qualify you again and you will need an appraisal on the property to ascertain its value.

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10. Move in and start making payments on the loan.

The home is yours! And so is the mortgage. You won’t have to make payments while construction is taking place, but once construction is done you will be making monthly payments toward the principal and the interest on the loan.

There are many nuances to the VA construction loan process, so make sure to become familiar with the VA website and associated documentation, and never hesitate to ask questions of lenders, builders, or any other professionals you work with on your building project. While the process may be time-consuming, you can end up with a brand-new home and a mortgage you can afford.

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