VA Construction Loans: What They Are and How They Work

Are you a veteran or an active-duty service member of the Armed Forces? Then you have probably spent a lot of time moving, packing up, and moving again. Maybe now you are ready to grow roots and build a home. If this sounds appealing to you, you should look into VA construction loans. They might just be the solution you need to realize your dream.

A VA construction loan is a home loan backed by the Veterans Administration (VA). With it, you can build your house without making a down payment or paying for private mortgage insurance (PMI). The best part is that you do not need to pay a VA funding fee, but this depends on your VA disability rating.

The VA is not going to fund construction directly. It is a private lender product backed by a VA guarantee. In simple words, a lender lends you the money for the loan, but it is federally supported.

Once you reach the end of our guide, you will know what to do to acquire this loan.

What are VA Construction Loans

A VA construction loan gives military members, veterans, or eligible surviving spouses a chance to purchase land and build a house. At the same time, they can enjoy the benefits of a VA mortgage, which include low or no down payment and favorable rates.

Lenders usually do not ask for a down payment or private mortgage insurance (PMI).

How Do They Work

A VA construction loan utilizes a draw period system. It means that you pay the builder at certain points throughout construction. You have to provide a written approval before each disbursement or draw payment.

These loans have two closing structures: a one-time close and a two-close VA construction loan. Here are the details:

One-Time Close Construction Loan

Our VA loan lender in California describes a one-time close loan or a construction-to-permanent loan as something that lets you combine construction financing and a permanent mortgage into one single transaction. This feature reduces complexities and formalities while adding a few extra perks. You only choose once, which means you lock in your mortgage terms before the construction work starts.

Here are the advantages and disadvantages of one-time closings.

Advantages:

• One loan application, one underwriting process, and one closing.
• Pay closing costs only once.
• Loan converts to a traditional mortgage.

Disadvantages:

• Less flexibility to change lenders or loan terms.
• More stringent loan requirements upfront.

Two-Close Construction Loan

A two-time close basically means you build a house in two separate phases. First, you have to secure a short-term construction loan to pay for erecting the house. Once the property is built, you will undergo a second closing. This means the loan converts into a traditional VA mortgage, which then becomes the mortgage you pay every month.

Here are the benefits and drawbacks of a two-close construction loan.

Advantages:

• Any changes in the cost or timeline may give you more options.
• It may change your permanent mortgage lender after construction.
• It can be refinanced based on the updated property value.

Disadvantages:

• May face risks of being denied for the second loan.
• Managing two loans requires more time, considering all the paperwork and coordination associated with the process.

Who Qualifies for a VA Construction Loan

Just like a standard VA loan, you must be an eligible veteran, active-duty service member, or qualifying spouse to apply for VA construction loans. You will also need a valid Certificate of Eligibility (COE) from the VA and plan to occupy the property as your primary residence. You must also meet the lender’s income, credit score, and underwriting requirements.

Apart from everything mentioned above, you must meet the following construction-specific requirements:

• Builder licensing, insurance, and builder vetting
• Architectural plans, site plans, specifications
• Permits, zoning, inspections
• Appraisal on plans/notice of value
• Compliance with VA minimum property requirements
• Construction timeline and draw schedule

If you want to improve your chances of approval, choose an experienced VA builder, create a realistic budget, and include a plan B if your plan A goes awry for any reason. Your lender and builder can provide you with more information on how you can handle such situations.

Why Go for a VA Construction Loan

For starters, this type of loan comes with a low or no down payment. The rates are favorable, too, and there are other perks. Just remember that you may have to deal with limited lender participation because very few lenders offer this loan type. Builder requirements are also stricter, and there are a lot more risks and complexities.

Here are a few differences between VA construction loans and conventional construction loans.

How to Apply for a VA Construction Loan

It can be a little overwhelming for you to consider all the steps for building a new house. However, you should look at each step as one small bite and rely on your lender and builder to help you through the process. In an ideal situation, they will be experienced and can communicate what to expect.

Find a Lender

First of all, you need to locate a lender who makes you feel comfortable. Ask for quotes from several lenders or brokers and learn about their rates. Clear out every query that you might have about the interest rate and the annual percentage rate (APR), which is basically the entire cost of a loan.

Finally, you should try to get preapproved, as it will give you an idea of how much you can borrow from a lender. Then, you can use the information to set your budget for your home. Ideally, you should prioritize homes you can afford.

If you do not get approved, discuss the issues with your lender. These people work with hundreds of borrowers and can help you create a plan about how to fix the situation. For instance, if your credit score is too low, you can ask the lender about how you can improve your score and how it may affect your project.

Locate a VA-Registered Builder

You must keep your eyes peeled for a VA-registered building. Choosing the right one for your needs is one of the most crucial things to do in the entire home-building process. Start with your local home builder association. You need to check references, read reviews, explore other VA sources, and interview different builders to ensure you are choosing the right one. Remember that the VA does not require builders to request a VA ID on new and proposed construction properties. This streamlines processes and procedures for new builds.

After you decide on the perfect builder, they will submit the plans for the home to the VA, including blueprints and materials lists. They will also ensure that all the necessary permits are acquired.

Get the House Appraised

A home appraisal is a process that involves a real estate professional determining the fair market value of your property. The VA appraisal assures you and your lender that the house you are planning to erect is a fair price. The certification of an appraiser authenticates your plan to construct.

Appraisals are important because, before a loan can be approved, the VA appraiser must assess the house to ensure it meets the minimum property requirements (MPRs) of the VA and provide a Notice of Value (NOV).

Close On the VA Construction Loan

Once the initial plans are approved, you will close on your VA loan manufactured home. However, note closing could take between 45 and 60 days to complete. You will receive your funds based on your project’s timeline; the remainder goes into an escrow account that you can withdraw as needed.

Pass a VA Inspection

The VA does not need you to fulfill traditional home inspection requirements, which involve exploring problematic zones inside a home. Then again, it is crucial to note that the guarantee on a construction VA loan will not be issued until the VA receives a clear final compliance inspection report.

You will need to meet other VA requirements during the build. For example, your lender will conduct inspections to verify progress and that the build meets quality standards. These inspections will ensure your home meets the VA’s standards and that your builder continues to receive funds releases. It is important to communicate clearly with your lender and builder so that everyone is on the same page, particularly if you encounter delays on either end.

The Takeaway

When you are ready for the excitement of building after years of moving from one place to another due to your military career, VA construction loans can give you the jump-start you need to build your dream home.

You need to get approved by the right lender, choose the right builder, and stay in close communication with both. Also, ask every question that pops into your head. Your lender can give you enough information on subjects ranging from VA construction loan fees to construction risk to details like a required certificate of occupancy.

If you think you are ready to obtain a VA construction loan, contact ALT Financial Network, Inc. to learn about your options.

FAQs

Q1. Can you use a VA construction loan to buy land only?

A1. No. A VA construction loan is intended to finance both land purchase and home construction together. The property must become your primary residence once construction is complete and approved.

Q2. Do VA construction loans have loan limits?

A2. VA loans no longer have set loan limits for eligible borrowers with full entitlement. However, lenders may apply internal limits based on income, credit profile, and overall risk assessment.

Q3. How long does it take to build a home with a VA construction loan?

A3. Construction timelines vary by builder and location. Most projects take six to twelve months. Weather, permits, inspections, and material availability may affect the final completion schedule.

Q4. Can you refinance a VA construction loan after the home is built?

A4. Yes. After construction ends and the home converts to a permanent mortgage, you may refinance using a VA Interest Rate Reduction Refinance Loan or another eligible program.

Q5. What happens if construction costs increase during the build?

A5. If costs rise beyond the approved loan amount, you may need additional funds or adjust project plans. Lender approval is required for major changes to budget or scope.