VA Construction Loans: How to Build a House with a VA Loan

Imagine turning your dream home into a tangible vision, tailored precisely to your preferences and needs. For many veterans and active-duty service members, this dream can become a reality through VA construction loans—a lesser-known but incredibly valuable resource offered by the U.S. Department of Veterans Affairs (VA).

In this article, we’ll delve into the world of VA construction loans, uncovering the key details, benefits, and considerations that make them an attractive option for veterans looking to build the home of their dreams.

In this article (Skip to...)

• What is a VA construction loan?
• Who qualifies for a VA construction loan?
• How to build a house with a VA loan
• Pros and cons of VA construction loans
• Alternatives to a VA construction loan
• VA construction loans FAQ

What is a VA construction loan?

A VA construction loan allows an eligible borrower to purchase land and pay for the new construction of a home where they plan to live. The eligibility criteria are the same as for any VA home loan.

If you are eligible, there’s a good chance a VA loan will be best for you. Importantly, they tend to come with more competitive interest rates than other mortgages. Plus, they require zero down payment and don’t charge mortgage insurance.

VA construction loans come in two flavors. The first is a short-term mortgage that you can refinance into another VA mortgage once the home build is completed. The second is a “construction-to-permanent loan,” which means you need only a single, one-time close loan for the entire process. That saves you from having to close (and having to pay closing costs) twice.

Not all mortgage lenders offer either flavor of VA construction loans. You might assume that a specialist lender, such as Veterans United, would be a sure source. But, no. Its website says, “Many lenders, including Veterans United, do not currently offer this kind of financing.”

So, you may have to hunt down your new construction loan program. But construction-to-permanent loans are the rarer of the two. So, be prepared to undertake an extensive search for a mortgage lender with the right loan options if you want one of those.

Some VA rules for its construction loans

Most mortgage lenders have requirements for construction projects. And, while the VA is rarely a lender itself, it has plenty of rules that you and your mortgage lender must observe when you use a VA loan to build a house. Those include:

1. You can’t build your next home yourself. You’ll need a contractor to do all the work
2. That contractor must be licensed, insured, and registered with the VA. But it often takes only a matter of days for a sound contractor to register with the department
3. Your proposed home can’t be some wild folly. It must be “readily marketable," which means it must appeal to a large enough pool of home buyers that it’s easy to sell when you want to move on
4. The site must be safely accessible year-round from a road
5. You must build the home intending it to be your main place of residence
6. You have to begin construction work soon after buying the land. If you want to hang onto the land before developing it, you may need a land loan until you’re ready to break ground

For more, read VA minimum property requirements, which cover all VA loans, including VA construction loans, when applicable.

Who qualifies for a VA construction loan?

Are you a veteran, service member, National Guard member, or reservist? Yes? Chances are you’ll be eligible for any VA loans, including VA construction loans.

Your eligibility will depend on when you served and the length of your military service. And you’ll need to have an honorable discharge.

The VA’s website lists in interminable detail the variations in the length of service that apply to different periods of service. However, the rules that apply to the vast majority of veterans and service members can be summed up as follows. You must have served:

• 90 consecutive days of active service during wartime OR
• 181 days of active service during peacetime OR
• More than six years with the National Guard or Reserves (or 90 days under Title 32 with at least 30 of those days being consecutive)

Some spouses of service members and veterans may also be eligible. The VA says, "...if you’re the surviving spouse of a Veteran or the spouse of a Veteran who’s missing in action or being held as a prisoner of war” you might be able to get a VA loan.

Still unsure? Call the VA’s helpdesk at 877-827-3702 (TTY: 711). It’s open Monday through Friday, 8:00 a.m. to 6:00 p.m. ET.

Nobody gets a VA loan without first obtaining a certificate of eligibility (COE) from the VA. Your mortgage lender will need one to process your home loan application and may offer to apply on your behalf. But you can save time and remove any uncertainty if you complete your COE application on the VA’s website.

Qualifying for a loan

Eligibility is often the easy bit. You also have to qualify for your home loan through a preapproval, just as every other borrower does.

Your mortgage loan officer will take a close look at your financial circumstances, starting with your credit score. The VA doesn’t set a minimum credit score. Most lenders want to see a score north of 620, but some may go down to a score as low as 580.

You’ll also need to show that you’ve been consistently employed and earn enough to comfortably afford the new home loan. Mortgage lenders will check your debt-to-income ratio to make sure it won’t cause you affordability issues.

How to build a house with a VA loan

Here are the seven main steps to home construction with a VA construction loan:

1. Find a mortgage lender that offers VA construction loans — This may not be as easy as it sounds. Many lenders don’t offer them. But they’re out there if you persevere
2. Obtain your Certificate of Eligibility (COE) — Find out how in the previous section of this article
3. Get pre-approved — Your mortgage lender will check your financial position (credit check, earnings, work history, existing debts, etc.) and confirm that you qualify for a loan in principle
4. Find a VA-approved contractor — You must use a contractor for your project and it must be licensed, insured, and registered with the VA. Good contractors can typically be quickly registered with the department
5. Submit building plans and specifications to your lender — An appraiser must confirm at the start that the finished home will be worth at least as much as the loan upon the project’s completion
6. Finalize your VA construction loan and start building — Once your mortgage loan is in place, your VA-registered builder can begin construction. Money will be released in tranches (“draws” or construction phase payments) as certain pre-agreed construction milestones are reached
7. Get your completed home VA-approved — There may be several inspections during the construction process, including a final one when the VA signs off on the project

If you don’t have a construction-to-permanent loan, there’s an eighth step. That’s refinancing your existing VA loan into a new one.

Pros and cons of VA construction loans 

Pros

1. It’s a VA loan. So, typically, you won’t need a down payment, will enjoy among the lowest mortgage rates around, and won’t have to pay private mortgage insurance, or PMI
2. You may be able to buy the land and build your home with a single loan
3. In most cases, there’s an option to roll up your loan closing costs within the home loan
4. It’s easier to qualify for a VA loan than most other mortgages

Cons

1. You’ll have to refinance into a new mortgage (probably another VA loan) once the project is finished — unless you have a construction-to-permanent loan
2. All VA loans charge VA funding fees, payable on closing. However, veterans with disabilities and recipients of Purple Hearts may be exempt from paying the fee. And you can often add your funding fee and other closing costs to your loan
3. Construction loans (including VA ones) tend to come with slightly higher interest rates than those for normal home purchases
4. It usually takes longer and involves more admin to build rather than buy a home. And appraisals and inspections tend to take longer

Alternatives to a VA construction loan

Nobody will make you use a VA construction loan. You could buy the land, perhaps with a land loan.

And then you could finance the construction project with another loan: a personal loan from a bank or specialist lender — or a home equity loan or HELOC if you’re an existing homeowner with plenty of equity.

Once the project is complete, you can then refinance those loans into a single mortgage, probably a VA loan, if you’re eligible. For most who are eligible, a VA loan brings so many advantages that it’s often a no-brainer.

Then, there are other types of construction loans, most notably from the Federal Housing Administration (an FHA construction loan) and the U.S. Department of Agriculture (a USDA construction loan). Each has its pros and cons.

The bottom line: VA construction loans

Don’t underestimate the challenges of building a home for yourself. It usually involves a ton of frustration and delays. And it can be hard to keep a rein on costs.

Using a construction loan can save some of the costs and hassle that come with the alternatives. And, if you’re eligible, a VA one may well turn out to be your best construction loan.

But a VA construction loan can leave you feeling hemmed in. That’s because you’ll need to follow plenty of rules.

And you can’t just build anything you want wherever you want. The new home must be accessible and attractive to a large pool of home buyers. So, you can’t be too self-indulgent.

VA construction loans FAQ