Does a VA Loan Cover New Construction?

The Department of Veterans Affairs (VA) loan program offers a significant benefit to eligible service members, veterans, and their surviving spouses, facilitating access to homeownership. VA loans are not directly issued by the VA; instead, they are guaranteed by the VA and provided through private lenders, such as banks and mortgage companies. These loans often feature benefits such as no down payment requirements, competitive interest rates, and no private mortgage insurance.

VA Loans for New Home Construction Eligibility

VA loans can indeed be used to finance the construction of a new home, offering multiple avenues for eligible borrowers. One common approach involves purchasing a newly built home directly from a builder. Another method involves a construction-to-permanent loan, which streamlines the financing process. This single loan covers both the construction phase and then automatically converts into a permanent VA mortgage once the home is complete. For those who own land or plan to acquire it, a VA construction loan can cover both the land purchase and the building costs. While it is possible to finance the land and construction together, many lenders do not directly fund the construction phase. Instead, borrowers might secure a separate construction loan and then refinance it into a permanent VA loan after completion.

Navigating the New Construction Loan Process

First, borrowers must obtain a Certificate of Eligibility (COE) from the VA, which confirms their entitlement to the VA home loan benefit. Selecting a builder experienced with VA loan requirements is another important preparatory step. While the VA no longer mandates builders to have a specific VA Builder ID for most new construction projects, it is beneficial to choose a licensed and insured builder familiar with VA standards. Detailed construction plans, material specifications, and a clear contract with the builder are necessary. These documents help establish the projected value of the completed home and are integral to the loan application.

The loan application is submitted to a VA-approved lender. Lenders will evaluate the borrower’s financial information, including income and employment stability, similar to a traditional VA purchase loan. A VA appraisal is then ordered, which is distinct for new construction. The appraisal is often based on the proposed plans and specifications, providing a projected value of the home upon completion. This “subject to” appraisal also ensures the property will meet VA Minimum Property Requirements (MPRs) once built.

During the construction phase, funds are typically disbursed to the builder in stages, known as “draws.” These disbursements are usually tied to the completion of specific construction milestones and are often contingent on inspections. A minimum percentage, such as ten percent of the construction amount, is commonly withheld until the final payment. VA-mandated inspections occur throughout the build to verify compliance with the approved plans and VA Minimum Property Requirements. Upon the completion of construction, a final inspection is conducted to confirm the home meets all VA standards and local building codes. The builder must obtain a certificate of occupancy, which is provided to the lender. After this final approval, the construction loan converts to a permanent VA mortgage.

Specific Requirements for VA New Construction Loans

Builders are typically required to provide a one-year warranty on the newly constructed home. The newly constructed home must meet VA Minimum Property Requirements (MPRs), which are standards designed to ensure the property is safe, sanitary, and structurally sound. These requirements cover various aspects, including structural integrity, adequate living space, proper utilities, and safe access. The home must also comply with all local building codes upon completion.

VA loans are intended for primary residences, and this owner-occupancy rule applies to new construction as well. Borrowers are generally expected to move into the home within a “reasonable time,” typically within 60 days of the loan closing. Borrowers should consider the different loan structures available, such as a one-time close loan, which combines construction and permanent financing into a single transaction. The one-time close option can offer benefits like securing the interest rate upfront and avoiding a second closing.

While VA loans are known for no down payment and no private mortgage insurance, certain fees are still associated with new construction. These can include appraisal fees, which vary, typically ranging from around $500 to $1,500. Most VA borrowers pay a VA funding fee, a one-time charge that supports the program. For first-time users with no down payment, this fee is commonly 2.3% of the loan amount, though it can be financed into the loan. Additionally, lenders may charge an origination fee, often around 1% of the loan amount, and other closing costs.