How to Buy Land and Build a Home With a VA Loan

The Department of Veterans Affairs (VA) loan program assists eligible service members, veterans, and surviving spouses in achieving homeownership. A common misunderstanding is that VA loans can finance raw land alone; however, the program promotes home occupancy. VA loans can be a powerful tool for acquiring land as part of a larger project to build a primary residence.

Understanding VA Loan Eligibility for Land Purchases

The fundamental principle governing VA loan usage for land is that it must be part of a project to construct a primary residence. The VA loan program is designed to facilitate homeownership, not speculative land investment. The VA mandates an occupancy period, generally requiring the borrower to reside in the home for at least one year after purchase.

A primary residence is defined as the place an individual lives for the majority of the year, typically more than six months. The property must serve as the borrower’s principal dwelling, not a vacation home or an investment property. While the VA generally expects occupancy within 60 days of closing, exceptions can be made for active-duty service members or if the home requires necessary repairs before move-in.

The VA loan program focuses on the completed home, not just the land. The constructed home must be affixed to a permanent foundation and meet the VA’s Minimum Property Requirements (MPRs). These MPRs ensure the property is safe, sanitary, and structurally sound, covering aspects like working utilities, adequate roofing, and proper drainage.

Types of VA Construction Loans

Veterans have specific financial structures available for acquiring land and building a home using their VA loan benefits. The most direct and common method is the VA One-Time Close (OTC) construction loan. This loan type consolidates the land purchase, construction financing, and the permanent mortgage into a single closing. This single closing structure can reduce overall closing costs and paperwork compared to a two-closing process.

With a VA OTC loan, the borrower secures financing for both the land and the construction project before any ground is broken. The loan automatically converts to a permanent VA mortgage once construction is complete, eliminating the need for a second closing or requalification. During construction, payments are typically not due, or interest-only payments are made, with regular principal and interest payments beginning after completion. This structure offers the advantage of locking in an interest rate before construction starts, protecting the borrower from potential rate increases.

A less common alternative is a two-time close setup. This involves obtaining a short-term construction loan, often from a private lender, to cover land purchase and building costs. This is followed by a separate VA loan to pay off the construction loan once the home is finished. While this approach means two sets of closing costs and two separate qualification processes, it can be a viable option if a VA OTC lender is difficult to find. The VA itself does not directly offer construction loans; rather, it insures loans made by private lenders.

The Process of Acquiring Land and Building with a VA Loan

The process of acquiring land and building a home with a VA loan begins with establishing eligibility. The initial step involves obtaining a Certificate of Eligibility (COE) from the Department of Veterans Affairs. This document confirms that the individual meets the VA’s military service requirements and outlines their available loan entitlement. While a COE is required before loan closing, a lender can often help obtain it, sometimes instantly through an online portal.

After securing the COE, finding suitable land is crucial. The land must meet VA requirements for construction, including proper access, utilities, and adherence to Minimum Property Requirements (MPRs). The property must be accessible year-round by vehicle and free from hazards like flood zones or excessive noise. The next step involves selecting a builder experienced with VA construction loans. While the VA does not “approve” builders, they do register them, ensuring builders understand and comply with VA guidelines.

The loan application for a VA construction loan requires detailed construction plans and specifications. These plans are submitted to the lender for underwriting, and an appraisal is conducted based on the future value of the completed home, not just the current land value. During construction, the lender disburses funds to the builder in stages, known as “draws,” as different phases of the project are completed. VA inspections are conducted at various stages to ensure the work progresses according to approved plans and meets VA MPRs. A final inspection is required upon completion to certify all VA MPRs are met and the home aligns with the original plans.

Important Considerations for VA Land and Construction Loans

Navigating a VA land and construction loan involves unique considerations beyond standard home purchases. Finding a lender experienced in VA construction loans is important, as not all lenders offer them due to inherent risks and complexities. These loans are generally more involved than financing an existing home, and some lenders may impose their own specific requirements, such as minimum credit scores or debt-to-income ratios, even though the VA itself does not set these.

The appraisal process for construction loans is based on the future value of the completed home, which can be challenging to determine accurately. Appraisers evaluate the land and proposed construction plans against comparable sales to arrive at a projected value. If the appraised value comes in lower than the project’s cost, the borrower may need to cover the difference.

Borrowers should also account for potential additional costs that might not be fully covered by the VA loan. While the VA loan can finance up to 100% of the land and construction costs for eligible borrowers, other expenses like permits, impact fees, or temporary utility connections might need to be paid out-of-pocket if not included in the construction contract. The VA funding fee, a one-time charge ranging from approximately 0.5% to 3.3% of the loan amount, applies to most VA loans and can be rolled into the loan principal. Closing costs for VA loans typically range from 1% to 6% of the loan amount, with the VA limiting certain fees and capping the loan origination fee at 1%.

The timeline for a VA construction project can be significantly longer than purchasing an existing home, often extending for several months to a year or more. Therefore, careful due diligence is necessary when selecting both the land and the builder to ensure a smooth process and a successful outcome. Builders are generally expected to provide a warranty, typically at least one year.