A Guide To VA Construction Loans
Andrew Dehan5-minute read
January 11, 2023
If you’re a service member or veteran who’s looking to build your own dream home, you might want to apply for a VA construction loan. Unlike VA mortgages, not all lenders offer these types of loans, and there is quite a bit of paperwork involved.
Keep reading to learn more about how to qualify for a VA construction loan. It’s important to note that Rocket Mortgage® does not offer funding to build the house but can help you refinance into a permanent VA loan once the house is complete.
What Is A VA Construction Loan?
You’re probably familiar with the common types of VA loans, where you receive a lump sum payment to buy an existing home. But what if you’re a current service member, qualifying National Guard personnel, an eligible reservist, a qualifying surviving spouse or a veteran looking to build your own home?
If so, then you may be a good candidate for a VA construction loan. VA construction loans are short-term loans that will help you cover the costs of constructing a new home. And instead of receiving one upfront payment, VA construction loans only pay for the portion of your home that’s completed. There are quite a few advantages to applying for a VA construction loan. For one thing, there are often no down payment requirements. And if you choose not to make a down payment, you won’t be required to take out private mortgage insurance (PMI).
Plus, some homeowners who take out VA construction loans are exempt from paying the VA funding fee. For example, there’s no funding fee for those receiving VA disability or qualified surviving spouses.
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Who Qualifies For A VA Construction Loan?
If you’re interested in taking out a VA construction loan, there are specific requirements you have to meet. And the process is much more time-consuming than simply applying for a VA home loan.
Just like with a VA loan, you’ll need to prove that you’re an eligible service member or veteran. But you’ll also need to meet the following requirements too:
- You must find a VA-approved builder who is properly licensed and insured.
- You and the builder must submit a complete set of plans when applying for the loan.
- You may need to submit additional documentation about the materials you plan to use.
- The plans for the home must be appraised.
How Do VA New Construction Loans Work?
The VA construction loan process is complicated because not all lenders offer this kind of loan. But it’s not impossible – here’s the step-by-step process you’ll take to apply for the VA construction loan program.
1. Get A Certificate Of Eligibility (COE)
VA loans and VA construction loans are only available to eligible active-duty service members, veterans, qualified reservists or National Guard personnel and eligible surviving spouses. And to prove that you meet these conditions, you’ll need to provide a certificate of eligibility, or COE.
Your COE proves that you meet the requirements to apply for your VA construction loan. You’re generally eligible for a COE if you’ve served at least 90 days of active military service or completed 6 years of honorable service. Here are specific eligibility requirements.
2. Get Preapproved For A Loan
Next, you need to get preapproved for the loan. You can do that through a bank or credit union. However, not all VA lenders provide VA construction loans, so you may have to ask additional questions during the preapproval process.
Preapproval is essential because it helps you get an idea of the type of house you can afford to build. It also shows your builder that you’re committed to seeing this process through.
3. Find A VA-Registered Builder
Once you’ve been preapproved for the loan, you can start looking for a VA-registered builder. The Veterans Information Portal is an excellent resource for you to use.
Any builder you use must be VA-registered to get approved for a VA construction loan. And they’ll have to submit their plans for the home and the materials they plan to use ahead of time.
4. Get The Property Appraised
The next step is to hire a VA home appraiser to evaluate the proposed plans. It’s a good idea to choose an appraiser who is familiar with VA construction loan guidelines.
5. Close On The VA Construction Loan
Once your initial plans have been approved, it’s time to close on the VA construction loan. The entire process could take 45 to 60 days to complete.
Unlike a typical mortgage, you won’t receive the funds immediately upon closing. Instead, the funds will be dispersed depending on the timeline of your project. The remainder is deposited into an escrow account to be withdrawn on an as-needed basis.
6. Pass VA Inspection
Once the home is built, you’ll need to complete an official VA inspection. Once your project is considered complete, what happens next depends on the way your loan is structured. Sometimes you can do construction-to-permanent financing and the loan becomes a permanent VA loan.
In other cases, you’ll need to pay off your construction loan. This is commonly handled by refinancing into a permanent traditional VA loan. Rocket Mortgage can help you with this.
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Things To Consider About VA Construction Loans
The idea of building your own home is exciting, but qualifying for a VA construction loan is not easy. The loan process takes 45 to 60 days to complete, and you have to close on the loan before the construction phase can begin.
Owners are also not allowed to assist in the building process. That's because all builders must be licensed, insured and approved by the VA. And the builder is responsible for the construction closing costs, though these costs can be wrapped into the home buyer’s and builder’s agreement.
FAQs On VA Construction Loans
Let’s look at a few additional questions you may have about VA construction loans.
What kind of house can I build with a VA construction loan?
Every 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 to your loan officer or lender to get additional details.
How are interest rates set with VA construction loans?
The Department of Veteran Affairs doesn’t set or regulate interest rates on VA homes. Instead, the interest rates depend primarily on the borrower’s credit score and lending history. The lender will also use other benchmarks to determine an interest rate, like the borrower’s debt-to-income ratio.
When do mortgage payments begin with a VA construction loan?
VA mortgage payments begin once the home construction is completed, and the loan must be repaid within the remaining term. You’ll need to discuss the repayment terms directly with your lender.
The Bottom Line
There are plenty of loan options available to help you finance building a home. But VA construction loans make it possible for active service members or veterans to build their own house without a large down payment. There are many advantages to taking out this type of loan, but the approval process is not always easy.
You should gather your paperwork, make sure you meet the requirements and calculate your needed loan amount before filling out an application. If you’re interested in a permanent VA loan after your construction is complete, you can apply online or give one of our Home Loan Experts a ring at (833) 326-6018. For more information, check out our guide to VA loans.
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