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What Is a VA Construction Loan?
The Department of Military Affairs has a home loan program that helps military veterans and service members buy or build homes. One of the loans available is a VA construction loan, which eligible borrowers can use to build their next home.
As one of the many benefits available to military veterans, these loans come with better terms than traditional construction loans. Borrowers can often get a loan with no down payment and a less-than-desirable credit score, all without having to pay mortgage insurance.
To get started, borrowers can visit the VA website to get their Certificate of Eligibility and see the list of VA-approved lenders. Before you start looking into lenders, though, it’s important to fully understand how this type of loan works and how it can help you achieve your home-building dreams.
What is a VA construction loan?
A VA construction loan is a home loan designed to help veterans build a home. VA construction loans come in two forms: VA direct home loans or VA-backed home loans.
A VA direct home loan is a loan in which the Department of Veterans Affairs serves as your lender. A VA-backed home loan is one where you work with a private lender instead of directly with the VA. The VA still backs these loans, though, meaning they guarantee them for the lender. If the borrower defaults on the loan, the VA will cover some or all of the lender’s losses.
VA construction loans work a bit differently than traditional VA loans. Rather than buying a home that’s already standing, the borrower is taking out the loan to finance the build. The borrower isn’t borrowing a sum of money and paying it off over 30 years, either. They get a short-term loan to finance the construction costs instead.
Once the construction is complete, borrowers can either take out a new mortgage to cover the costs or simply roll their construction loan over into a mortgage.
How to get a VA construction loan
To qualify for a VA construction loan, borrowers must meet certain requirements and apply for a Certificate of Eligibility (COE). A COE shows your lender that you have met the service history requirements for a VA loan. To get a COE, veterans and service members must have served for a minimum amount of time, which will vary based on when they served.
In addition to the COE requirements that are standard for all VA loans, those applying for a construction loan have some other unique requirements to meet. The borrower will have to submit detailed plans and specifications to the VA for review. The VA encourages VA borrowers to choose turnkey projects rather than custom builds, but it’s not a requirement.
Other requirements include:
- Credit score: There’s no minimum credit score for VA loans unless required by your individual lender.
- Down payment: There’s no minimum down payment for VA loans unless required by your individual lender.
- Debt-to-income (DTI) ratio: There’s no maximum DTI for VA loans, but lenders have to provide compensating factors when a DTI exceeds 41%.
- Funding fees: VA loan borrowers will have to pay a one-time funding fee, which reduces the cost of the loan for U.S. taxpayers. The funding fee for each loan is dependent on the down payment — the lower the down payment, the higher the funding fee. These fees range from 1.4% to 2.3% of the loan principal.
To get started applying for a VA loan, veterans and service-members can visit https://www.ebenefits.va.gov/ebenefits/homepage.
VA construction loan benefits
The VA loan program, which includes VA construction loans, is just one of the benefits available to veterans and service members in the United States. These loans offer plenty of perks that eligible individuals may not be able to get with a traditional home or construction loan.
Because they are backed by the Department of Veterans Affairs, lenders can offer more favorable terms on these loans. VA loans usually come with no down payment requirements and fewer requirements for income, DTI and credit history. And unlike other home loans, those veterans who can’t make a down payment don’t have to pay mortgage insurance.
The Department of Veterans Affairs takes other steps to make its construction loans accessible, too. While the loans typically come with a funding fee, it may be waived for anyone with a service-connected disability, anyone who has received a purple heart and the spouses of people with a service-connected disability.
The VA takes other steps to make these loans as inclusive as possible. While most veterans and service members must meet certain service requirements to qualify, they have exceptions. People can still get a Certificate of Eligibility if they suffered hardship, certain medical conditions or a service-connected disability. And as long as borrowers meet certain requirements, they can use their Certificate of Eligibility more than once.
Tips for getting a VA construction loan
Are you considering getting a VA construction loan? Here are a few steps you can follow to make the process as simple as possible.
Secure your Certificate of Eligibility.
Lenders can only offer a VA-backed construction loan to someone who has secured a Certificate of Eligibility (COE). If you’re considering applying for a VA construction loan, be sure to get your COE first. That way, you have time to resolve any potential issues before you apply for a loan.
Make sure you have the proper documentation.
The Department of Veterans Affairs requires that construction loan borrowers provide many details about their home build before they can get a loan. You’ll need documentation that includes:
- Detailed plans and specifications developed by an architect or contractor
- A plot plan that includes the location of the home, driveway, water/sewer and more
- A construction contract that includes the terms of the project
Shop around with different lenders.
As with other types of loans, the terms you can get with this type of loan will vary from one VA construction loan lender to the next. While VA lenders all have to meet the same requirements, they can require different credit scores and down payments from borrowers. The VA construction loan rates you can get may also vary between lenders.