VA construction loans explained
Veterans who want to buy a new construction home or renovate their current one may be wondering if they can use a VA loan to do so. While VA loans can only be used to purchase existing homes, qualified veterans may be able to use a VA construction loan instead.
However, finding a VA lender and VA approved builder can complicate the process. Still, veterans who want to finance their new construction or home renovations can take out a conventional loan and refinancing into a VA mortgage to still take advantage of this benefit.
A VA construction loan is a short-term loan for new construction houses. They can help cover the costs of purchasing land and the construction of the home, or fund the renovation of an existing home.
This type of construction loan comes with many benefits — like no down payment and lower interest rates and closing costs than conventional mortgages. Additionally, there is no requirement to take out private mortgage insurance (PMI), even if you have a downpayment lower than 20% of your home’s purchase price.
Unlike VA home loans that are paid in one lump sum, VA construction loans are paid in installments to the builder, only after they have completed various phases of construction. The process for payout varies lender to lender, but in most cases, the borrower approves the disbursal of funds throughout the construction process.
As a type of VA loan, you will first need to be an eligible service member, veteran, or family member to qualify for a VA construction loan.
Additionally, your new construction build or home renovation project, will need to meet the following requirements:
Applying for a VA construction loan is different from applying for a typical VA loan. Here’s a look at the process:
The first step to apply for any VA loan is to check your eligibility and confirm your entitlement amount. To do this, qualified current or former service members will need to obtain a Certificate of Eligibility (COE) from the VA.
This document certifies that you have met the minimum service requirements and are eligible for a VA loan. It can be accessed online, through the VA eBenefits portal.
Your COE will also confirm your entitlement — or, the amount of money that the VA will guarantee for your loan. The amount will vary depending on what county you’re purchasing in. Lenders typically approve loans up to four times the available entitlement amount.
If you’ve already bought a home with a VA loan, you may have cashed in some or all of your entitlement. You may need to sell or pay off your first VA mortgage to reinstate your entitlement before taking out your VA construction loan.
Just like when purchasing an existing home, you’ll need to get pre-approval for a construction loan. To get started on the process, you’ll first need to find a lender who offers VA construction loans. Not all lenders offer this type of financing, so this step may take some time.
Lenders will analyze your credit score, debt-to-income ratio, your entitlement, and other financial information to confirm the pre-approval amount. Your pre-approval letter will help you work with builders to determine what type of house you can afford to build.
Builders must be registered with the VA in order to receive VA construction loans. The VA hosts a list of approved builders on the VA Loan Guaranty website. You can request a customized builder report to find approved builders in your area. Alternatively, if your builder isn’t already registered, they can do so by applying to the Construction and Valuation unit of the local VA Regional Loan Center. New builders are typically approved within five business days.
→ Here’s what to ask a new home builder
Just like existing home sales need to pass a VA appraisal before the loan can close, new construction plans need to be approved by a VA home appraiser to ensure that the property meets their minimum requirements. Your lender will order the appraisal and your builder will provide the paperwork to describe the building plans, materials, and lot.
The closing process can begin after the plans have been approved, and can take up to 45 to 60 days to complete. Once the loan closes, the funds will be put into an escrow account and disbursed to the builder as they meet various milestones in the construction process.
After the construction has been completed, the finished home will need to pass another VA appraisal. The VA home appraiser will be looking to ensure that the house meets the VA’s minimum property requirements and that the home is structurally sound, sanitary, and safe.
After the home passes the appraisal, construction is considered complete and the loan will need to be paid. Most often, borrowers choose to do this by refinancing the VA construction loan into a traditional VA home loan.
Not all VA lenders offer VA construction loans, because of the increased risk of these types of loans. New constructions bring a myriad of unknown variables, and lenders prefer the surer bet of financing a completed house. However, there are still lenders who are willing to work with new construction builds — you just have to find them.
A good starting point is to speak with a VA loan officer at an approved VA lender. Even if they aren’t able to offer a VA construction loan, they may be able to point you in the right direction.
If you’re unable to secure a VA new construction loan or VA approved builder, consider applying for a conventional construction loan or construction loan backed by the FHA. There are more lenders who offer this type of construction loan, making the process easier. Once your home is complete, you can refinance your mortgage into a VA loan, and take advantage of the many benefits of VA loans.
At Orchard, we’re dedicated to helping veterans find and finance their dream home. Learn more about how Orchard works today.
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