When it comes to homebuying, the only thing more exciting than finding your home may be building one exactly how you imagined. Who wouldn't want the chance to lay out every part of their home just right?
Paying for that dream, however, can be tricky. That's especially true for Veterans who want to finance new construction with a VA loan. Building a home with a VA loan is possible, but doing so requires effort. Here's what you need to know to get a VA loan for new construction.
You can build a home with a VA loan through some lenders, though there aren't many of them. A true VA construction loan is a short-term mortgage designed to cover the costs of building a new home.
These loans may be single-close, meaning the entire process of buying land, building and financing the final product are all covered by one loan process. But in many cases, it will be a two-part process: one close for construction and one for buying the home. Regardless of which route you choose, you'll have to start construction immediately, as the VA won't lend money for land unless you start building on it simultaneously.
Finding a lender willing to issue a VA construction loan can be difficult, as upfront construction costs deter lenders. Even if borrowers find a lender who will issue a VA construction loan, it may not come with that important no-money-down feature that makes VA loans so attractive. Talk with a VA lender before getting a construction loan.
To secure a VA loan for new construction, you'll first need to qualify for a VA loan. That means you or your spouse must meet the VA's service requirements and obtain a VA Certificate of Eligibility (COE), which we'll discuss more below.
Beyond general VA loan requirements, you'll also need to meet other VA new construction guidelines to qualify for this type of financing. You must work with a VA-registered builder who can provide a one-year builder's warranty for the property. Your lender will also require an appraisal of the construction plans and building site. Individual lenders may require additional documentation, including proof of income, credit history and information about any other outstanding loans you have.
As part of the loan approval process for a VA construction loan, your lender will examine your credit report and score to determine your risk level as a borrower. Most VA-approved lenders require a minimum credit score of 620, but this can vary by lender.
There are no set limits for VA construction loans. As long as you have your full entitlement available, meaning you've paid off any previous VA loans, you can borrow as much as your lender will allow based on your credit history and other financial factors.
If you use a VA loan to build a home, you'll need to meet the same guidelines used for a traditional VA loan. Generally, the property must be a single-family home or a VA-approved condominium. However, you can also get VA loans for certain modular homes and multi-unit properties, as long as you live in one of the units.
The VA also has a list of Minimum Property Requirements (MPRs) that every property must meet. These cover certain safety and sanitary guidelines, so you'll need to ensure that your site and building plans meet these standards. Keep in mind that each lender may have its own additional requirements, as well.
The process for securing a VA loan for new construction is fairly straightforward, and it generally involves the following steps.
Before you apply for a VA loan, it's a good idea to ensure you're eligible. Your lender will require a VA COE; they can usually check this directly through the VA’s online system.
True VA construction loans are hard to come by, so look for lenders that offer this specific financing. When you're comparing lenders, be sure to ask if they offer this type of loan before you go through the trouble of applying.
Once you've found a few lenders that offer VA construction loans, get preapproved. With a preapproval, you'll know your eligibility for loan rates and terms. Plus once you have preapproval in hand, you can more smoothly move through the rest of the process.
Although the VA doesn't approve a builder, it does require them to register with the department before funding projects they develop. This process is relatively quick and simple, and a builder can usually obtain registration within five business days.
To confirm your builder is registered with the VA, visit the VA's online list of registered builders.
As with any VA loan, you'll need a loan appraisal to assess the value of the proposed property and ensure it meets the VA's MPRs. This is required for verifying your property's and site's eligibility, as well as determining your maximum loan amount.
Once your lender approves your construction plans and appraisal, you can close on your VA construction loan. This process usually takes about 30 to 45 days. After closing, you'll be able to draw funds from an escrow account as needed to pay for construction.
When you purchase an existing home, the inspection takes place before closing. But with a construction loan, the inspection takes place after the home is built. Here again, the VA-approved inspector will verify that the finished home meets all MPRs.
Depending on how your VA construction loan was structured, you may need to close on a second loan after construction is finished. This essentially converts your loan from a construction loan into a standard VA home loan. In some cases, this conversion will happen automatically.
If your lender offers it, the simplest way to use a VA loan for building a home is a VA one-time close construction loan, also known as a VA construction-to-permanent loan. This streamlines the process and makes closing on your new loan much easier since you'll only need to do it once. With this type of loan structure, your lender can automatically convert your construction loan to a permanent loan once the home is completed.
Alternatively, you may have a two-time close loan. In that case, your lender will convert your loan into a permanent VA home loan once construction ends. A lender may handle this like a refinance or a new-purchase loan. Either way, you'll need to go through a second closing process, which could involve additional paperwork and documentation.
Even if you can't find a lender that offers a true VA construction loan, you're not out of luck. In many cases, you can get around this roadblock by breaking your loan into two parts: a standard construction loan and a VA purchase loan or refinance.
In this setup, you'll need to qualify for a conventional construction loan. Unlike a VA loan, this may require a down payment. If you can make this work, you'll use it to pay for construction, then refinance your short-term loan into a long-term VA purchase loan or VA Cash-Out Refinance. Each of these options has its own terms, and your lender can help you decide which best fits your situation.
If you go this route, it's a good idea to get the ball rolling toward your permanent home financing long before the builder finishes building your dream home. A construction loan is a short-term loan by design, and your long-term financing should be prepared as early as possible.
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† ICB Solutions is a division of Neighbors Bank, which is an affiliate of Mortgage Research Center, LLC dba Veterans United Home Loans.