VA construction loans are used by military veterans, active duty service members and their eligible surviving spouses to help them own their own homes. This loan can be an effective means of achieving home ownership because of the advantages it provides.
Compared to other types of loans, the standards for VA construction loans are less flexible — not just anyone can qualify for a VA construction loan. Only military personnel, veterans and their families are eligible for VA construction loans. To fully benefit from this loan, eligible borrowers should learn how it operates.
Learn about how VA construction loans work, the benefits, what you need to qualify and more.
Building a home with a VA construction loan is exclusively available to military members, veterans, and their surviving eligible spouses.
VA construction loans are different from VA loans because they are paid according to project milestones as they are met.
You can use a VA construction loan to build a single-family home to reside in.
What Is a VA Construction Loan?
VA construction loans are a kind of loan offered to military members, veterans and their eligible surviving spouses to help aid in the construction of a house. Take note that this type of loan is not the same as VA home loans, which can help with the purchase of a house.
There are numerous advantages to getting a VA construction loan, including the following:
- Not needing a downpayment if you are a fully-entitled veteran.
- Not needing mortgage approvals.
- Needing a credit score of only 640 to qualify.
Because VA construction loans are short-term loans, the borrower does not get all the money at once. A portion of the loan is granted to the borrower depending on whatever part of the house is built first; then, funds are released on a per-project milestone basis.
How Does a VA Construction Loan Work?
Understanding how VA construction loans work is essential to determine if they’re right for your situation, as not all lenders offer them.
Finding VA Construction Loan Lenders
Both banks and credit unions offer VA construction loans — but the terms and availability vary from lender to lender. The best way to find out if your desired lender offers a VA construction loan is to get in touch or check out their website.
To find the best VA construction loan lender for your needs, you can:
- Speak to fellow veterans or members of the military. It’s possible to find military families who have gotten approved for VA construction loans in the past. Try asking a good friend for references.
- Ask your contacts in construction for references. If they constructed homes for military families before, they likely know the lender their previous clients got in contact with.
- Refer to your local VA regional office. Find yours through the VA benefits website.
VA Construction Loan Uses
Although VA construction loans are readily available to those who qualify, there are certain restrictions regarding the kind of home you can build. The home needs to be:
- A single-family dwelling because a home constructed to house multiple families does not qualify.
- Built on land the qualified family owns or plans to purchase.
- Located in the United States.
- The family’s primary residence since homes intended to be sold or rented out don’t qualify for VA construction loans.
Benefits of a VA Construction Loan
Although many families in the United States want to build their own homes, not all can afford to do so. VA construction loans help offer financial security to veterans and military members and help them settle into a home of their own.
Here are some advantages of applying for a VA construction loan:
- You don’t need an approved mortgage to qualify.
- No need for down payments.
- Interest rates and loan terms are competitive.
- Closing costs are much lower than those of conventional loans.
- No need for a high credit score.
While on the hunt for VA construction loans, ask potential lenders about their experience with getting this kind of loan approved. Not every lender that caters to veterans can offer VA construction loans, so expect that the search for a reputable lender will take some time.
VA Construction Loan Requirements
Qualifying for VA construction loans does not end with meeting the minimum criteria. Before you meet with your lender, take note of the loan requirements and documents you need to prepare to qualify for your own VA construction loan.
Four things must be provided to the Construction and Valuation unit of the VA loan center in the desired area where you will build the home. These are:
- Information about the builder and their certification on their letterhead
- Equal Employment Opportunity Certification VA Form 26-421
- VA Form 8791 VA Certification for Affirmative Marketing
- A copy of the builder’s license, if necessary.
Certificate of Eligibility (COE)
You can request a certificate of eligibility (COE) through your lender or via mail.
Your lender might be able to get your COE via an online system called Web LGY. Ask your lender whether they offer this.
You can also fill out a Request for a Certificate of Eligibility (VA Form 26-1880) and mail it to your regional loan center. However, requesting a COE via the mail could take longer than getting one through your lender.
Here are the following requirements for origination appraisal:
- Fill out an application for the inspection fee panel. After submitting the application, it is forwarded to the Regional Loan Center (RLC) in your location.
- If you wish to be considered for geographic areas served by multiple RLCs, you must submit separate applications.
- On block 18 of the application form, at least two of the three letters attesting to your qualifications must be from other appraisers.
Minimum Credit Score
Compared to more traditional lenders, you don’t need an exceptionally high credit score to qualify for a VA construction loan. Lenders that approve VA construction loans are the authorities and get to set minimum credit scores for loan approval, and the VA has no jurisdiction over this.
Income & DTI Ratio
Your debt-to-income (DTI) ratio often dictates your creditworthiness. It tells a lender how much you owe next to how much you make. To compute your DTI.
- Get your gross annual income.
- Divide this amount by 12 to get your monthly gross income.
- Multiply your monthly gross income by 0.41 to get your maximum allowable debt obligation.
You can likely qualify if your monthly debt obligation is less than your maximum allowable debt obligation.
How to Get a VA Construction Loan
Because VA construction loans are only available to a select group of people, you can expect that it might be a little more challenging to apply for this kind of loan compared to more conventional loans. Review the steps below to understand how it works.
Obtain a Certificate of Eligibility (COE)
A COE tells lenders you are eligible for a VA loan in general. How you qualify will depend on a few factors. To learn more, review our guide on VA home loan requirements.
Find a lender and get pre-approved
Compare quotes from different providers and follow all the specific requirements this lender lists for you.
Connect with a VA-registered builder
Find a VA-registered builder that suits your needs. Before signing a contract, double and triple-check the documents to ensure you’re working with the right builder. Good VA-registered builders have a history of working with military families on their homes.
Submit building plans
Submit your building plans to the regional office assigned to you, as they will have to approve these plans before a VA construction loan can be granted.
Get a home appraisal
Based on your build and specifications, your lender will release an appraisal to you. You will receive a Notice of Value stating your home’s fair market value.
Sign the documents & close on the loan
When you’re ready, sign the documents to close on your loan. Expect to be paid according to each project milestone completed and prepare for repayments.
Frequently Asked Questions About VA Construction Loans
In case you still have questions regarding getting approved for a VA construction loan, you can review our frequently asked questions below.
- U.S. Department of Veterans Affairs. "Construction and Valuation." Accessed August 11, 2022.
- U.S. Department of Veterans Affairs. "How to request a VA home loan Certificate of Eligibility (COE)." Accessed August 10, 2022.
- U.S. Department of Veterans Affairs. "VA Home Loans." Accessed August 10, 2022.
- U.S. Department of Veterans Affairs. "Veterans Benefits Administration." Accessed August 10, 2022.