Can You Use a VA Loan to Buy Land?
Uncover the precise conditions under which a VA loan can incorporate land, navigating eligibility and process to achieve homeownership.
The Department of Veterans Affairs (VA) home loan program helps eligible service members, veterans, and surviving spouses achieve homeownership, often with no down payment and competitive interest rates. While a VA loan is not for buying raw land alone, land can be financed as part of a broader home acquisition. This article clarifies how land can be incorporated into a VA loan, particularly for construction.
VA Loan Eligibility for Land Purchases
VA loans are primarily for purchasing or constructing a primary residence. Financing raw land as a standalone investment or for speculative purposes is generally not permitted. The VA guarantees loans for homes occupied by the borrower.
Land can only be financed as part of a VA-guaranteed loan when directly tied to the construction of a primary residence. This includes building a new home or purchasing a manufactured home permanently affixed to the land.
Types of Construction Loans and Land Scenarios
Land can be financed under a VA loan through specific construction scenarios. For a new site-built home, a VA construction loan allows simultaneous purchase of the land and financing of the home’s construction. The land and dwelling are financed together as a single loan, converting to a permanent mortgage once the home is complete.
VA loans can also be used for manufactured homes, provided specific conditions are met. The manufactured home must be permanently affixed to a foundation and classified as real property, not personal property. The land must be included in the purchase and financed together with the home.
When an existing home is purchased with a VA loan, the land it occupies is inherently included in the overall financing. This is distinct from purchasing undeveloped land, as the loan’s primary focus remains the established dwelling. While this is a common application, the program’s provisions for land acquisition primarily revolve around new construction.
Requirements for VA Land and Construction Loans
Borrowers must satisfy specific eligibility and property criteria before applying for a VA loan that includes land and construction. A primary requirement is obtaining a Certificate of Eligibility (COE), which confirms military service and entitlement to VA loan benefits. Lenders can assist in retrieving this document. Service requirements vary based on active duty, National Guard, Reserve, or surviving spouse status.
Lenders also assess financial stability, including credit scores and debt-to-income (DTI) ratios. While the VA does not set a minimum credit score, most lenders prefer 620 or higher. The preferred DTI ratio for VA loans is 41% or lower, calculated by dividing total monthly debt payments by gross monthly income. Lenders may approve loans with higher DTI ratios if there are strong compensating factors.
The property, encompassing both the land and the future home, must be the veteran’s primary residence. All construction plans must adhere to the VA’s Minimum Property Requirements (MPRs), ensuring the home is safe, sanitary, and structurally sound. The builder must be VA-registered, possessing the necessary licenses and providing a warranty. Required documentation includes proof of service (such as a DD-214), income statements, credit history details, detailed construction plans, and contracts with the VA-registered builder.
The VA Land and Construction Loan Process
The process for securing a VA land and construction loan begins by finding a lender experienced with VA construction loans. Not all VA-approved lenders offer this specific product.
Borrowers undergo a pre-qualification or pre-approval process to determine the potential loan amount and estimate borrowing capacity. Formal application submission then occurs, providing documents like the Certificate of Eligibility and construction plans for lender review.
The lender’s underwriting team reviews the application to ensure compliance with VA guidelines. Upon approval, construction commences, and funds are disbursed in stages, known as draws. These draws are tied to specific construction milestones and require inspections to verify progress before the next funds are released. The process concludes with a final inspection upon home completion, followed by loan closing, where the construction loan converts into a permanent VA mortgage.