A guide to VA construction loans

If you’re a veteran or service member who’s looking to build your dream home, you might consider applying for a VA construction loan. Unlike with traditional VA mortgages, not all lenders offer VA construction loans, and quite a bit of paperwork is involved.

Let’s walk through the process of how to qualify for a VA construction loan. Note that Rocket Mortgage^® doesn’t offer funding to build the house, but we can help you refinance into a permanent VA loan once the house is complete.

What is a VA construction loan?

VA construction loans are short-term loans that will help you cover the cost of constructing a new home. Instead of coming as one upfront payment, a VA construction loan only pays for the portions of your home that are completed. 

In many cases, a VA construction loan will have no down payment requirement. And if you choose not to make a down payment, you won’t be required to pay private mortgage insurance (PMI). Another advantage of a VA construction loan is that some borrowers who take out this type of loan are exempt from paying the VA funding fee, which typically accompanies a standard VA loan. This exemption applies to those receiving VA disability, and it’s likewise the case for qualified surviving spouses.

Perhaps you’re 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 an active-duty service member or you’re qualifying National Guard personnel, an eligible reservist, a qualifying surviving spouse or a veteran looking to build your own home? If this is you, a VA construction loan may be an excellent option.

Who qualifies for a VA construction loan?

If you’re interested in a VA construction loan, you’ll have to meet some specific requirements. And the process is much more time-consuming than applying for a VA home loan.

Just like with a VA loan, you’ll need to prove you’re an eligible service member or veteran. But you’ll also need to:

• Find a VA-approved builder who’s properly licensed and insured
• Submit, in combination with the builder, a complete set of plans when applying for the loan
• Possibly submit additional documentation about the materials you plan to use
• Get the plans for the home appraised

How to apply for a VA new construction loan

The VA new construction loan process tends to be complicated because not all lenders offer this kind of loan. Here’s the step-by-step process you’ll follow to apply for the VA construction loan program:

1. Acquire a certificate of eligibility (COE)

VA loans and VA home building loans are only available to eligible active-duty service members and veterans, qualified reservists and National Guard personnel, and eligible surviving spouses. And to prove 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 put in at least 90 days of active military service or completed 6 years of honorable service. Read about specific eligibility requirements to learn more.

2. Get preapproved for a VA loan

Next, you’ll 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 in order for you to get approved for a VA construction loan. They’ll also 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 hiring a VA home appraiser to evaluate the proposed plans. It’s a good idea to choose an appraiser who’s 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 – 60 days to complete.

Unlike a typical mortgage, you won’t receive the funds immediately upon closing. Instead, the funds will be dispersed based 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 will depend 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.

Factors to consider about VA construction loans

The idea of building your own home can be exciting, but qualifying for a VA construction loan isn’t easy in many cases. The loan process typically takes 45 – 60 days to complete, and you must 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. The builder is responsible for the construction closing costs, although these costs can be wrapped into the agreement between the home buyer and the builder.

FAQs on VA construction loans

Let’s walk through the answers to a few questions you may still have about VA construction loans.

How does a VA construction loan work?

VA construction loans are short-term loans that will help you cover the cost of constructing a new home. Instead of coming as one upfront payment, a VA construction loan only pays for the portions of your home that are completed.

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 rates depend 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 an 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

Plenty of loan options are available to help you finance a home build. But VA construction loans make it possible for active-duty service members or veterans to build a house without making a large down payment – or any down payment. Other advantages also come with using this type of VA loan to build a house, but the approval process isn’t always easy. 

Before filling out an application, gather your paperwork, make sure you meet the requirements and calculate the loan amount you’ll need. 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 call at (855) 540-4975.