It's easy to forget that a house in the suburbs is not the only option a first-time home buyer has with a VA home loan. There are plenty of options available and the Department of Veterans Affairs has anticipated many of them when it comes to purchasing property and choosing options.
For example, did you know the VA will approve home loans for qualified borrowers who want a custom-built home? A construction loan has rules and procedures specific to the issues related to having a new home built from scratch as opposed to an existing home.
The VA Lender's Handbook has several things to say regarding the use of the VA loan benefit for land purchases. According to Chapter Three of the handbook, "eligible purposes" for a VA home loan include the ability to "purchase or construct a residence, including a condominium or cooperative unit, to be owned and occupied by the veteran as a home.” The rules include some stipulations concerning what can be purchased:
The VA will not allow the purchase of unimproved land with the intent to improve it at some future date, meaning the land purchase is not in conjunction with a construction loan.
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Some borrowers already own land and don't want to purchase more. VA rules state, "Loans may also be guaranteed for the construction of a residence on land already owned by the veteran (a portion of the loan may be used to refinance a purchase money mortgage or sales contract for the purchase of the land, subject to reasonable value requirements)."
One key obstacle you should keep in mind is the general hesitancy of lenders to issue VA loans for new construction. Since the VA loan program is voluntary and the lenders who take part are participating lenders, the VA cannot require these lenders to offer certain types of loan products. You may ultimately need to seek construction financing from a home builder or a community lender and look to refinance the construction loan into a permanent VA-backed mortgage.
When applying for a VA loan, ask your lender what the rules and restrictions are for purchase loans for new construction in your area.