Does VA Loan Cover Building a House?

Veterans and service members often consider using their earned benefits to achieve homeownership, including building a new residence. A VA loan can indeed cover building a house, but this process involves a specific type of financing known as a VA construction loan. This specialized loan program assists eligible individuals in financing new home construction. The VA loan program expands access to homeownership for those who have served.

Understanding VA Construction Loans

A VA construction loan is a short-term financial instrument covering new home building expenses. Unlike a traditional mortgage that disburses a single lump sum, funds for a VA construction loan are typically released in stages, known as draws, as the construction progresses. This phased disbursement ensures funds are available for specific building milestones.

VA construction loans have two primary structures: one-time close and two-time close. A one-time close loan consolidates construction financing and the permanent mortgage into a single loan with one closing, streamlining the process and potentially reducing costs. A two-time close involves an initial construction loan refinanced into a separate, permanent VA loan once the home is complete. These loans can also finance land purchase, provided construction begins immediately.

Eligibility and Approval for Borrowers and Builders

VA construction loans require meeting eligibility criteria for the borrower and builder, plus property and plan requirements. Borrowers must establish service eligibility, typically 90 days active service during wartime, 181 days peacetime, or six years in the National Guard or Reserves. A Certificate of Eligibility (COE) confirms these service requirements.

Financial qualifications are assessed. Lenders commonly require a FICO score of at least 620. Lenders also review the borrower’s debt-to-income (DTI) ratio, often preferring it to be 41% or less, and evaluate residual income.

Builders must meet specific criteria. The home must comply with VA property standards. Builders must be licensed, insured, and provide a one-year warranty. Builders must commit to VA inspections throughout the building process.

The property must be the borrower’s primary residence. Detailed construction plans, including blueprints, must be submitted and approved. The completed home must adhere to the VA’s Minimum Property Requirements (MPRs), ensuring it is safe, sanitary, structurally sound, and meets local building codes. The land must have access to roads and essential utilities like water, electricity, and sewage.

Navigating the VA Construction Process

After meeting eligibility criteria, the next phase involves navigating the VA construction loan process. Select a VA-approved lender experienced in construction loans, as not all lenders offer this product. Once chosen, the complete application package, including eligibility and approved plans, is submitted.

The loan then proceeds to the appraisal and underwriting stages. The VA appraisal for new construction focuses on the home’s future value upon completion. The appraisal confirms the proposed home meets VA standards and is valued for the loan amount. Underwriting reviews all documentation to assess risk and confirm the borrower’s ability to repay.

During construction, funds are disbursed incrementally through draws. As milestones are achieved (e.g., foundation, framing), the lender releases funds to the builder. Disbursements are contingent on VA-required inspections, ensuring work aligns with approved plans and VA minimum property requirements. The borrower authorizes each draw, confirming satisfaction. During the construction loan period, borrowers generally make interest-only payments on disbursed funds.

Upon construction completion, a final inspection verifies the home meets all VA Minimum Property Requirements and local building codes. For a one-time close loan, the construction loan automatically transitions into the permanent VA mortgage, with no second closing. In a two-time close scenario, the borrower applies for a separate, permanent VA loan to pay off the construction loan, establishing the long-term mortgage.

Costs and Loan Limitations

Understanding costs and loan limitations is important when considering a VA construction loan. A notable cost is the VA funding fee, a one-time payment for most VA loans that helps sustain the program. This fee can be paid upfront at closing or rolled into the loan amount, though financing it increases overall interest paid.

The funding fee rate varies by loan type, first-time or subsequent VA benefit use, and down payment amount. For VA construction loans, rates are generally consistent with purchase loans, ranging from approximately 1.25% to 3.6% of the loan amount. Certain individuals are exempt from paying this fee, including:
Veterans receiving compensation for service-connected disabilities
Those eligible for such compensation but receiving retirement pay
Purple Heart recipients
Eligible surviving spouses

Borrowers with full VA entitlement typically do not face maximum loan limits; those with partial entitlement may. These limits vary by county; the standard county loan limit for 2025 is $806,500 for single-family homes in most areas, and up to $1,209,750 in high-cost counties. These limits influence the maximum amount borrowed without a down payment.

Allowable costs in a VA construction loan include land purchase (if construction is immediate), and direct construction costs like labor, materials, and services. Certain closing costs are permitted, including:
Title insurance
Recording fees
Discount points
Credit report fees
Appraisal fee

Lenders may require a contingency reserve fund (often 5-10% of the loan) to cover unforeseen construction expenses. The VA loan program generally limits certain fees and does not permit the borrower to perform the construction work.