A guide to VA construction loans

As a veteran or active-duty service member of the Armed Forces, you may have spent years moving, packing up, and moving again. At this point, you might be ready to plant roots and build a house – and a VA construction loan might sound like it’s ready-made for you. (It just might be the perfect solution!)

A VA construction loan is a home loan backed by the Veterans Administration (VA) that allows you to build a house without a down payment or private mortgage insurance (PMI), and without having to pay a VA funding fee (depending on your VA disability rating).

The VA doesn’t directly fund construction; it’s a private lender product backed by a VA guarantee – in other words, a lender lends you the money for the loan, but it’s federally supported.

After reading through our helpful guide, you’ll know the exact steps you need to take to obtain a VA construction loan.

What is a VA construction loan?

A VA construction loan offers a way for military members, veterans, or eligible surviving spouses to buy land and build a house with the same benefits as a VA mortgage, including low or no down payment and favorable rates.

VA construction loan lenders typically don’t require a down payment or private mortgage insurance (PMI). (PMI means you pay for extra insurance to your lender.)

How does a VA construction loan work?

A VA construction loan uses a draw period system, which means you pay the builder at certain points throughout construction. You must give your written approval before each disbursement or draw payment.

Construction loans have two closing structures: a one-time close and a two-close VA construction loan, which we’ll detail below.

One-time close construction loan

A one-time close loan, also called a construction to permanent loan, allows you to combine construction financing and a permanent mortgage into a single transaction, which means fewer steps and other perks. You only close once, which means you lock in your mortgage terms before construction begins.

Here are the pros and cons of one-time closes:

Pros:

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

Cons:

• Less flexibility to change lenders or loan terms
• Stricter loan requirements upfront

Two-close construction loan

A two-time close simply means you build a house in two separate phases. First, you secure a short-term construction loan to pay for building the house. Once the home is built, you’ll undergo a second closing, which means the loan converts into a traditional VA mortgage, which then becomes the mortgage you pay on each month.

Let’s take a look at the pros and cons of a two-close construction loan:

Pros:

• Changes in cost or timeline may give you more options
• Can change your permanent mortgage lender after construction
• Can refinance based on updated home value

Cons:

• May face risks of being denied for the second loan
• Managing two loans requires more time, what with paperwork and coordination

Who qualifies for a VA construction loan?

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

You’ll also need to ensure you meet the following construction-specific requirements:

• Builder licensing, insurance, 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

You can increase your chances of approval by choosing an experienced VA builder, manage a realistic budget, and add in contingency buffers (solutions you’ll pursue if your build goes awry). Your lender and builder can give you more information on how to handle these situations.

Why use a VA construction loan?

VA construction loans offer low or no down payment, favorable rates, and other perks. However, it’s important to remember that you may face limited lender participation (not every lender offers VA construction loans), stricter builder requirements, more complexity, draw risks, and more.

To simplify what you need to know, VA loans vs. conventional loans require the following: 

How to apply for a VA new construction loan

It may seem daunting to consider all the steps for building a new home, but consider each step in small bites and lean on your lender and builder to help you through the process. Ideally, they’ll be experienced and can communicate what to expect.

1. Find a lender

First, you’ll need to find a lender that makes you feel comfortable. Get quotes from several lenders or brokers and learn about their rates. Ask any questions you have, including the interest rate and the annual percentage rate (APR), which is the full cost of a loan.

Ultimately, you want to get preapproval because it’ll give you an idea of how much you can borrow and can help you set your budget for a home. You want to look for homes you can afford.

If you have trouble getting approved, discuss any issues with your lender. They have worked with hundreds of borrowers and can help you come up with a plan for how to solve your issue. For example, in the case of a too-low credit score, you may want to ask your lender for information about how to improve your score and what it might mean for your build.

2. Find a VA-registered builder

When you choose a new home builder, you’ll need to be on the lookout for a VA-registered builder. Choosing the right builder for your needs is one of the most important things you can do in the home-building process. Start with your local home builder association. You’ll want to check references, read reviews, look into other VA sources, and interview builders to ensure you’re choosing the right one. (Note that the VA no longer requires builders to request a VA ID on new and proposed construction properties, which streamlines processes and procedures for new builds.)

Once you decide on the perfect builder, they will submit plans for the home to the VA, including blueprints and materials lists, as well as ensure the necessary permits will be obtained.

3. Get the property appraised

A home appraisal involves a real estate professional determining the fair market value of your plans. The VA appraisal assures you and your lender that the house you’re planning to build is a fair price. An appraiser’s certification should authenticate your plan to build.

The appraisal is important because before the loan can be approved, the VA appraiser must assess the home to ensure it meets the VA’s minimum property requirements (MPRs) and provide a Notice of Value (NOV).

4. Close on the VA construction loan

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

5. Pass a VA inspection

The VA doesn’t require you to fulfill traditional home inspection requirements, which involves taking a look at problematic areas inside a home. However, it’s important to note the guarantee on a construction VA loan will not be issued until the VA receives a clear final compliance inspection report.

You’ll also have 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’s important to communicate clearly with your lender and builder so everyone is on the same page, particularly if you encounter delays on either end.

FAQ about VA construction loans

Still have questions about whether a VA construction loan fits your situation? Let’s take a look at a few questions borrowers sometimes ask about VA construction loans.

Do you have to put money down on a VA construction loan?

You likely won’t have to put money down on this loan type because they are no-down payment loans. However, you will have to provide your lender with proof of income and reserves as well as information about your credit, assets, and debts.

How long does a VA construction loan take?

Closing could take 45 – 60 days to complete. Check with your lender to learn more. Knowing the exact dates (or even an estimate) can help you plan your path forward. It’s also important to note that most construction projects take at least a year to complete.

What kind of house can I build with a VA construction loan?

Every VA construction loan lender has specific requirements for the types of homes built with a VA construction loan. For example, mobile or manufactured homes are unlikely to be approved. To find out if the type of house you want to build is allowed, you can speak with your loan officer or lender for more details.

How are interest rates set with VA construction loans?

The Department of Veterans Affairs doesn’t set or regulate interest rates on VA homes. Instead, the interest rate depends primarily on the borrower’s credit score and lending history. The lender will also use other benchmarks, like the borrower’s debt-to-income ratio, to determine a final interest rate.

When do mortgage payments begin with a VA construction loan?

VA mortgage payments begin once the home construction is completed, and you must repay the loan within the remaining term. You’ll need to discuss the repayment terms directly with your VA lender.

The bottom line: VA construction loans can finance your dream home

When you’re ready for the excitement of building after potentially years of moving around due to your career in the military, a VA construction loan can help give you the jump-start you need to build the home of your dreams.

It’s important to get approved by the right lender, choose the right builder, and stay in close communication with both. Also, ask as many questions as you can. Your lender can give you more information ranging from VA construction loan fees to construction risk to details like a required certificate of occupancy.

Ready to obtain a VA construction loan? Contact one of our Home Loan Experts about your options for converting your construction loan into a regular mortgage.

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Rocket Mortgage is a VA-approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.