Whether you’re looking to customize a new home from the ground up or renovate an existing property, a VA construction loan can help make it happen. With flexible terms and competitive rates, these loans are one of the most affordable ways to make your dream home a reality.
Let’s dive into the intricate world of VA construction loans, explaining the process, highlighting the benefits and providing insights to eligible borrowers.
Can you build a home with a VA loan?
Yes, you can use a VA loan to build a house. VA construction loans are designed for veterans looking to build a home as their primary residence. That said, if you want to finance the construction from beginning to end with a VA loan, the process can be more challenging than purchasing a recently completed “new construction” home.
One of the biggest challenges is finding a VA construction loan lender. Many lenders do not currently offer this type of financing, but options are still available for veterans aiming to build their ideal home and utilize their VA loan benefit.
VA Construction Loan Requirements
To qualify for a VA construction loan, you must fulfill the requirements set by the Department of Veterans Affairs (VA). These encompass not only the standard criteria for a VA loan but also a set of additional prerequisites.
VA construction loan requirements include:
- Construction plans and specifications: You must provide detailed plans and specifications of your proposed construction project to the lender for approval.
- Builder requirements: The builder you choose must be licensed and insured, have experience with VA construction loans and meet VA standards for quality and safety.
- Construction loan fees: You may be required to pay certain fees associated with the construction loan, such as an origination fee and inspection fees.
- Inspections: The construction project will be subject to regular inspections to ensure it meets VA and lender standards.
- Appraisal: The property will need to be appraised to determine its value and ensure it meets VA and lender requirements.
- Funding disbursement: Funds for the construction project are disbursed in stages rather than as a lump sum to ensure that the project stays on track and meets quality standards.
How to Get a VA Construction Loan
VA construction loans can be a great option for those who want to build their dream home, but they are not all the same. Depending on your unique needs and circumstances, different types of VA construction loans may be more suitable for you. By researching and comparing different VA construction loan options, you can find the loan that best meets your individual needs and helps you achieve your home-building goals.
Getting a VA One-Time Close Construction Loan
Obtaining a true VA construction loan is technically possible but often not easy. Most VA lenders won’t finance the construction of a home, so finding a lender for a one-time close VA construction loan is rare.
If you are able to find a lender for this type of loan, follow the below steps to build and finance your new home using your VA benefits:
1. Find a lender: Not all lenders offer VA construction loans, so you’ll need to find a lender that does. You can use our VA lender search tool to find lenders in your area that offer VA loans.
2. Obtain a Certificate of Eligibility (COE): This is the first step in the process where the borrowers need to prove their eligibility for the VA construction loan.
3. Qualify the borrower(s): The next step is to verify the financial status of the borrower(s). This includes examining their credit score, debt-to-income ratio, employment history and revenue.
4. Order appraisal: Before starting the construction process, it is necessary to obtain an appraisal to ensure that the loan amount aligns with the planned construction. Good communication is key in this step to avoid misunderstandings regarding the value assessment.
5. Issue a Notice of Value (NOV): This step involves issuing a notice of the property’s estimated value based on the appraisal.
6. Pay the VA funding fee: The VA funding fee is a one-time payment that helps support the VA loan program. Borrowers must pay this fee as part of their VA construction loan.
7. Close the loan: Following the payment of the funding fee, the loan can be closed. This needs to be done in the same way it was ordered.
8. Begin construction: After the loan closure, the construction of the property can begin.
9. Final Inspection/CO: Once the construction is complete, a final inspection is conducted to verify that the work aligns with the plan submitted. Following the inspection, a Certificate of Occupancy (CO) is issued.
10. Modify the loan: Post construction, based on the new property’s estimated value, the loan could be modified.
11. Guaranty the loan as a purchase: The final step in obtaining a one-time close VA construction loan is to guarantee the loan as a purchase. This means that if the borrower defaults on the loan, the VA guarantees to repay a portion of it.
Getting a Two-Time Close VA Loan: Construction-to-Permanent Refinance Loans
Although it can be difficult to get a true VA construction loan, a construction-to-permanent refinance loan can be a useful workaround for most borrowers. With this type of loan, a borrower will utilize financing outside of the VA to construct the home (usually through the builder), then obtain a separate VA loan at the end of construction to essentially pay off the original financing.
Follow the below steps if you’re interested in a construction-to-permanent refinance loan:
1. Get connected with a VA lender: Firstly, you need to find an experienced VA lender to discuss their construction loan options. Keep in mind that not many VA lenders offer financing for new construction, so a thorough search might be required.
2. Verify Certificate of Eligibility: You must present your Certificate of Eligibility (COE) to the lender to show that you are qualified for a VA loan.
3. Find a builder: Search for a licensed, insured and VA-approved builder. The selected builder then submits a complete set of construction plans to the lender.
4. Qualifying the borrower: The lender verifies the borrower’s income, employment and financial status to ensure they can afford the loan.
5. VA appraisal order: The lender orders a VA appraisal based on the construction plans and specifications. The appraisal helps determine the home’s fair market value.
6. Issue Notice of Value (NOV): Once the appraisal is complete, the VA issues the Notice of Value (NOV). This document contains details about the property’s value based on the VA appraisal.
7. Closing the initial loan: The initial loan is closed using NON-VA financing. This loan is meant to cover construction costs.
8. Start construction: Once the loan is disbursed, construction of the property begins.
9. Complete construction: Complete the construction as per the submitted plans.
10. Final inspection: Once construction is finished, a final inspection is required. The original appraiser conducts this inspection, ensuring the built property meets the VA’s Minimum Property Requirements.
11. Qualify the borrower again: Before proceeding with the permanent financing, the borrower’s financial status is reassessed.
12. Appraisal order, if appropriate: If necessary, the lender orders another appraisal.
13. Issue NOV, if appropriate: Depending on the situation, the lender may issue a new NOV.
14. Close the loan: Once everything is in order, the lender closes the final loan. This is the permanent financing that replaces the initial financing.
15. Pay the VA funding fee: The borrower needs to pay the VA funding fee, which may be included in the loan amount or paid in full at closing.
16. Guaranty the loan as a purchase: Lastly, the lender wraps up the process by signing off the loan as a standard VA purchase loan. As the borrower, you will now enter repayment.
What Kind of House Can I Build with a VA Construction Loan?
When it comes to building a house with a VA construction loan, you have lots of options! Most lenders and the VA will require that the home you build meets typical VA minimum property requirements, such as being structurally sound, safe and sanitary. Generally speaking, mobile homes are not allowed for VA construction loans.
Experienced VA lenders can provide additional details about what is allowed in terms of the type of home you can build with a VA construction loan. It’s important to speak with them before starting the process to ensure that your new home meets all the necessary requirements.
A VA construction loan can be used to build a variety of different types of homes, including:
- Single-family homes: This is the most common type of home built with a VA construction loan. It can be a detached home or a townhome owned and occupied by the borrower.
- Multi-unit properties: VA construction loans can also be used to build properties with two to four units, as long as the borrower intends to occupy one of the units as their primary residence.
- Modular homes: VA construction loans can be used to build modular homes that are constructed off-site and then delivered to the building site for assembly.
- Manufactured homes: VA construction loans can also be used to build manufactured homes that are built in a factory and then transported to the building site.
It’s essential that the home being built must be intended as the borrower’s primary residence and meet local building standards in addition to VA MPRs. The construction project must be completed within a specified time frame, and the borrower must work with a VA-approved builder and lender.
VA Construction Loan FAQs
How will my credit score affect a VA construction loan?
If you’re looking to secure a VA construction loan, your credit score is a key factor that lenders will consider when determining whether or not to approve you for the loan. Generally speaking, if your credit score is too low, securing a VA construction loan may be difficult.
If your credit score is below average, but you have a solid income and a good debt-to-income ratio, there’s still a chance you can get approved. If you have questions about how your credit score might affect your chances of securing a VA construction loan, it’s always best to speak with an experienced lender or loan officer.
What is the debt-to-income ratio for a VA construction loan?
The debt-to-income (DTI) ratio is a factor that lenders consider when you apply for a VA construction loan. Your DTI ratio helps lenders determine whether or not you can afford the loan and if they should approve your application.
Although the VA does not set a maximum DTI ratio, most lenders place additional scrutiny on DTI ratios over 41%. This means all your monthly debt payments should be no more than 41% of your gross monthly income.
If your DTI ratio is above 41%, getting approved for a VA construction loan will likely be difficult. However, other options may be available, such as increasing the down payment or finding another lender with slightly different requirements.
Remember that lenders look at every individual’s situation differently, so what works for one person may not work for another. If you need clarification on your DTI ratio or would like some help figuring out how to improve it, speak with an experienced lender or loan officer who can provide personalized advice and guidance tailored specifically to you.
Can I Transfer My VA Construction Loan?
Yes, you can transfer your VA construction loan to a new lender. This process is known as refinancing, and it can help you save money on your loan by reducing your interest rate or switching to a loan with better terms.
When refinancing, you’ll need to go through the same application process as when you applied for the original loan. This includes gathering the necessary documents and providing financial information such as credit score and income verification.
Some lenders may not accept refinanced VA construction loans, so it’s important to research before applying. There may also be fees associated with refinancing, so make sure you understand exactly what those are before making any decisions.
VA construction loans can be a complex financing option that may not be right for everyone. Many borrowers also struggle to find VA lenders to finance construction. Due to the intricacies involved, proper research and help from experienced professionals can make the process smoother. Borrowers should carefully evaluate their financial situation and long-term goals to determine whether a VA construction loan is the right choice for them.