Can You Get a VA Loan to Build a House?

Eligible veterans and service members can use their Department of Veterans Affairs (VA) home loan benefit to finance the construction of a new home. This specialized financing option, a VA construction loan, allows qualified individuals to build a custom residence rather than purchasing an existing property. It offers benefits such as no down payment and competitive interest rates, similar to traditional VA purchase loans. This program provides a pathway to homeownership for those who envision building a property tailored to their specific needs and preferences.

Eligibility for VA Construction Loans

To qualify for a VA construction loan, an applicant must meet specific service requirements established by the VA. This includes 90 days of active service during wartime, 181 days of active service during peacetime, or six years of service in the National Guard or Reserves. Surviving spouses of service members who died in the line of duty or from a service-connected disability may also be eligible.

A crucial document for any VA loan application is the Certificate of Eligibility (COE), which confirms a service member’s VA home loan entitlement. This certificate verifies that the individual meets the military service requirements. Applicants can obtain a COE through the VA’s eBenefits portal, by mail, or with assistance from a VA-approved lender.

Lenders also assess the applicant’s creditworthiness, though the VA itself does not set a minimum credit score. Most lenders require a credit score of at least 620. The lender evaluates the applicant’s overall financial profile, including their debt-to-income (DTI) ratio, which compares monthly debt payments to gross monthly income. While the VA prefers a DTI ratio of 41% or less, lenders may approve applications with higher ratios if compensating factors are present, such as significant residual income or a strong credit history.

Income stability is another important factor lenders consider to ensure the borrower can consistently repay the loan. Lenders look for a two-year history of stable employment and income, often verified through W-2s or tax returns for self-employed individuals. The income must be sufficient to cover the mortgage payments and other monthly expenses, and it should be expected to continue for at least three years into the future.

Finally, the home built with a VA construction loan must serve as the borrower’s primary residence. Borrowers are expected to occupy the property within 60 days of the loan closing, although exceptions for active-duty service members or those with specific military orders may allow for an extended period, typically up to 12 months.

Requirements for the Construction Project

Borrowers must either already own the land or acquire it as part of the construction loan financing. It is generally not permissible to use a VA loan solely to purchase land without immediate plans for construction. The land must also meet specific VA guidelines, including suitable access to public or private streets and availability of essential utilities like water, electricity, and sewage disposal. Rural properties may utilize wells and septic systems if they comply with local codes.

A primary requirement for a VA construction project involves working with a builder recognized by the VA. The builder must be licensed, reputable, and experienced in new home construction. Lenders require builders to demonstrate financial stability and familiarity with VA loan requirements and property standards. The borrower is not permitted to perform any of the construction work themselves; the builder must be a licensed professional.

Comprehensive building plans and specifications are necessary for the construction project. These documents include detailed blueprints, material lists, and cost estimates for the entire build. These plans are subject to review and approval by the lender and must outline the scope of work. They serve to establish the expected value of the completed home, which is important for the appraisal process.

The constructed home must adhere to the VA’s Minimum Property Requirements (MPRs) and all applicable local building codes. MPRs ensure the property is safe, sanitary, and structurally sound. These standards cover aspects such as structural integrity, heating, plumbing, electrical systems, and overall habitability.

Throughout the construction process, inspections are required at various stages. These inspections verify that construction is progressing according to the approved plans and meets VA MPRs and local codes. Common inspection points include foundation completion, framing, and mechanical systems installation. A final inspection is conducted upon completion to confirm the home is built as specified and is ready for occupancy.

Understanding the VA Construction Loan Process

The structure of a VA construction loan follows one of two primary models: the one-time close or the two-time close. A one-time close loan combines the construction financing and the permanent mortgage into a single loan, requiring only one closing. This structure simplifies the process by locking in the interest rate before construction begins and eliminating the need for a second qualification or additional closing costs once the home is complete.

In contrast, a two-time close loan involves two separate transactions. The first loan covers the construction phase. Upon completion of the home, a second, permanent VA mortgage is taken out to pay off the construction loan. This option offers flexibility, as it allows borrowers to secure a new interest rate for the permanent loan based on market conditions at the time of conversion. However, it also means two separate closing processes and associated fees.

Funds for construction loans are not disbursed as a single lump sum. Instead, they are released in stages, known as “draws,” as construction progresses and specific milestones are achieved. The lender manages these draws, releasing funds after a portion of the work, such as the foundation or framing, is completed and verified by an inspection. A percentage of the funds, often 10%, is held back until the final inspection is passed and construction is fully completed.

The lender plays a role in overseeing the construction process and ensuring compliance with loan terms and VA requirements. This includes managing the disbursement of draws, coordinating inspections, and reviewing progress reports.

Throughout construction, VA-required inspections and appraisals are conducted at key junctures. These inspections confirm that the work aligns with the approved plans and meets the VA’s Minimum Property Requirements. Appraisals are also performed to ensure the property’s value will support the loan amount upon completion. A final appraisal is required before the loan converts to its permanent phase or the final draw is released, confirming the home’s completed value and adherence to standards.

For borrowers pursuing a two-time close loan, the final step involves converting the construction loan into a permanent VA mortgage upon the home’s completion. This conversion requires a final appraisal to confirm the property’s value. The borrower then formally closes on the permanent VA loan, which pays off the temporary construction financing.