Can I build a house with no money down?
Are you seeking to build a new home from the ground up? Are you an active-duty service member or veteran?
If so, you may qualify for a VA construction loan, sometimes called a VA construction-to-permanent loan.
This loan can finance everything from the land purchase and construction to a permanent mortgage for the finished residence. And, as with all VA mortgages, there’s zero down payment required for eligible borrowers.
The catch? VA construction loan lenders can be hard to find. So you may need to do some digging.
Learn more about what’s required, how to qualify, and if a VA new construction loan is right for you.
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What is a VA construction loan?
If you are an active duty service member or veteran with eligible service history — or a surviving spouse — you may be able to take advantage of a generous loan program provided by the U.S. Department of Veterans Affairs: the VA construction loan.
For eligible borrowers, a VA construction loan can simplify the process of building your dream home.
“The advantages of a VA construction loan include no down payment required, no minimum credit score specified, and no private mortgage insurance required on the VA permanent mortgage,” says Richie Duncan, senior loan officer with VA Nationwide.
And, the VA construction loan is flexible. Financing can be used for:
- The total cost of purchasing a lot, constructing a home on it, and financing the permanent mortgage on the residence once it’s finished. With this option, there is only one underwriting process, one appraisal, one set of closing costs, and a single closing. This is known as a VA one-time close construction loan
- The combined costs of buying land and building a house on it, after which your VA construction loan can be refinanced to a separate permanent VA mortgage loan. With this option, a single appraisal and single closing are involved with the short-term loan, but a separate underwriting process, appraisal, and closing costs are required for the permanent VA mortgage loan
- The construction of the home on land you already own or are financing separately, after which your VA construction loan can be refinanced to a separate permanent VA mortgage loan. As with option two, there’s a single appraisal and closing for the VA construction loan, but a separate underwriting process, appraisal, fee, and closing are needed for the permanent VA mortgage loan
The only problem is, finding VA construction loan lenders is tricky. If you can’t find a willing lender, you may have to pursue alternative financing options instead.
The VA construction loan process
The VA construction loan process involves a series of steps, according to Julie Aragon, CEO and founder of the Julie Aragon Lending Team:
- Your entitlement to VA benefits is verified by obtaining a Certificate of Eligibility (COE) and providing personal financial information to the lender. Prepare to collect and review copies of current credit reports, proof of income, statements of current bank and investment accounts, and other financial documents the lender may request
- Find a lender that offers VA construction loans and get pre-approved. Note that the VA does not lend directly, so you will have to search for a private lender offering this program
- Choose an approved builder/general contractor that is properly licensed and approved by the VA and submit your home construction plans to the lender
- Have an appraisal of the property completed
- Have the completed home inspected according to VA standards and complete the closing process
- If your VA construction loan does not include a permanent mortgage loan component, you’ll need to refinance to a VA home loan once the home is built
“Note that, for VA construction loans, disbursement of the funds to pay for the building of the home occurs in a series of installments, or ‘draws,’ at certain milestones as the construction progresses,” explains Aragon.
VA construction loan requirements
Several rules apply to VA construction loans, including guidelines for the borrower, the contractor, and the home being built.
First, you need a decent credit score.
“While VA guidelines do not specify that borrowers have a minimum credit score or meet other financial criteria, most actual VA loan lenders will. To improve your eligibility chances, aim for a minimum credit score in the 620 to 640 range,” Aragon recommends.
- Your debt-to-income ratio (DTI) should be below 41%
- You must meet income requirements based on the size of your family
- You must not have experienced bankruptcy in the last two years
- You need stable income and employment; you must be able to comfortably afford mortgage payments
Prepare to verify two years of income when applying for a VA construction loan.
For W-2 borrowers, gather the last 60 days of pay stubs, the last two years of W-2s, and your last two annual tax returns. Self-employed borrowers should collect the last two years of full personal and business tax returns as well as all tax schedules involved.
The home being built needs to meet certain requirements, too, including:
- The finished home must be owner-occupied as your primary residence
- The types of homes eligible to be built include single-family homes, condominium units in approved projects or legal phases, and manufactured homes
- Your total loan amount for construction/the permanent mortgage must not exceed $548,250 for most US counties in 2021
- The property must be located in a VA-approved area and must not exceed VA maximum land limitations, such as 10 acres
- The property must be inspected by a professional approved by the VA
“Keep in mind that respective local regulations will dictate the property requirements for your VA construction loan,” notes Dan Holtz, co-founder and CEO of Sovereign Lending Group.
And, finally, there are limitations around which lender and contractor you can work with.
- You must choose a VA-approved mortgage lender that participates in the VA construction loan program
- The VA must approve of your chosen contractors. “They are required to have needed licensure, liability insurance, and a minimum of two years of experience building homes,” Duncan says
- You must receive a new construction warranty from the builder
Finally, any remaining funds after construction ends must be applied directly toward your loan principal. You can’t receive cash-back from this type of loan.
VA construction loan lenders
Be aware: It may be challenging to find VA construction loans or lenders offering these loans.
“Many lenders offer standard VA home loans for those purchasing existing residences. But fewer provide VA construction loans,” cautions Aragon.
“Also, the VA has traditionally provided limited guidance regarding its construction loans, which translates to widespread uncertainty and a lack of familiarity with lenders’ guidelines and requirements,” she continues.
The good news is, you can visit the VA’s website to search for VA-approved lenders. However, not all VA lenders offer VA construction loans. So be prepared to contact multiple companies until you find one that does.
VA construction loan interest rates
Another caveat is that you’ll likely pay a higher interest rate for a VA construction loan than you will for a standard VA mortgage loan.
“That’s because participating lenders view home construction loans as being somewhat more of a risk,” explains Aragon.
Interest rates for construction loans are typically at least 1% higher than standard mortgage rates.
“Unlike a mortgage loan on an existing home, there is no finished property that serves as collateral. So expect the interest rate to be a bit higher — typically 1% higher or more, although the rate you are quoted may vary.”
Another reason your rate may be higher? “A long-term rate lock is required, which may result in a higher interest rate,” says Holtz.
Other construction financing options
If you don’t qualify for a VA construction loan or can’t find a participating lender, you’re not out of luck. There are other financing options you can pursue for your new home.
For example, you could obtain a separate lot loan to buy the land and a traditional construction loan to pay for the construction expenses, followed by a separate VA home loan to finance the permanent finished residence.
“The drawback with this approach is that you will have separate underwriting, appraisals, closings, and fees, and your non-VA construction loan will probably require a down payment,” says Duncan.
Or, you can pursue an FHA construction-to-permanent loan, which combines the lot purchase, construction costs, and permanent mortgage financing on the completed house into one loan with one appraisal and a single closing. However, you likely have to put down at least 3.5% to 10% and pay private mortgage insurance upfront and annually.
Alternatively, if you choose a USDA-approved rural area to construct a home in, you may be eligible for a USDA construction-to-permanent loan. These also require no down payment and combine the lot purchase, construction costs, and permanent mortgage loan into one loan product.
Lastly, instead of building a new construction home, home buyers might consider purchasing a fixer-upper.
The Bottom line: Check all your options
Whichever route you choose, make sure you explore all your options.
Even though construction loans are a bit harder to come by, you still want to shop around and make sure you’re getting the best loan type and interest rate available to you.