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For many, the opportunity to design and construct a home from the ground up is an exciting yet daunting prospect. With so many considerations like financing, hiring builders, managing the construction timeline and more, it can feel overwhelming.

However, if you’re eligible for a veteran affairs (VA) loan, you may have a powerful option for turning your dream home into reality through a VA construction loan. This specific mortgage program allows qualified borrowers to finance the costs of building a brand new, fully personalized home tailored to their vision.

In this article, we’ll explore what VA construction loans are, who may qualify, and how the process works from application through the final walkthrough.


Eligibility Requirements for VA Construction Loans

Not everyone can take advantage of VA loan advantages. There are specific service requirements and financial criteria that determine eligibility for a VA construction loan:

Military Service Requirements

  • Current active-duty members with at least 90 consecutive days of service
  • Veterans with 24 months of continuous service, or the full period for which they were called to duty
  • Veterans discharged due to service-connected disability
  • National Guard members with at least 90 days of qualifying active service
  • Reservists with at least 90 days of non-training active-duty service

Click here for full Certificate of Eligibility (COE) requirements.

Financial Requirements

  • Minimum credit score of 640, can vary by lender, debt-to-income (DTI) ratio and loan-to-value (LTV)
  • Steady, sufficient income and employment to support monthly mortgage payments per VA guidelines
  • DTI ratio under 43%, though higher ratios may be allowed with compensating factors

If you meet these basic eligibility qualifications, your first step is to obtain your VA Certificate of Eligibility.


The VA Construction Loan Process

There are two main types of VA construction loans: the single-close loan and the construction-to-permanent loan, also known as 2X Close.

Single-Close Loan: This option combines the construction financing and permanent mortgage into one loan. You’ll close once upfront before construction starts to receive all funds

Construction-to-Permanent Loan (2X Close): This route requires two loan closings – first on a construction-only loan, then a second time on the permanent mortgage once construction is complete.

Whichever option you choose, the overall process typically follows these general steps:

  1. Obtain your VA COE and get pre-approved by a lender who is experienced with VA loans.
  2. Provide the lender with construction plans, projected costs, builder information and financials.
  3. The lender orders an appraisal based on the future property’s plans/specs to determine value.
  4. If approved, secure necessary permits and close on the construction loan portion
  5. During the construction phase, funds are released in phases to your builder as the project progresses, triggered by inspections at key milestones like completion of the foundation, framing, and the final build.
  6. Inspectors will examine the property at these milestones to ensure it meets VA minimum requirements before authorizing the next disbursement of funds.
  7. After the final inspection, you close on the permanent VA mortgage to replace any initial construction financing.


The Construction Phase Explained

One major benefit of a VA construction loan is that the purchase price of the land itself can be included in the overall loan if you don’t already own the property. Once the loan closes, the lender will manage the multi-month construction process, disbursing funds directly to the homebuilder as outlined in the loan documentation.

Inspectors will conduct thorough evaluations at pivotal construction milestones before authorizing release of the next round of funds to the builder. These inspections help ensure the new home meets all the VA’s minimum property requirements around site specifications, building materials, energy efficiency and more.

For example, you may have an initial inspection after the foundation is poured, followed by evaluations of the framing, electrical, plumbing, and final completed property. At each approval point, the next disbursement of funds is released directly to your builder based on the pre-determined schedule.

After passing the final inspection, you can truly make it your own by putting the final interior design touches on your brand new, custom-built dream home – paid for with your hard-earned VA loan advantages.


Advantages of VA Construction Loans

Compared to traditional options, a VA construction loan offers several compelling advantages:

  • Down payments are generally not required – a huge advantage over conventional home loans
  • You avoid paying for private mortgage insurance (PMI), potentially saving hundreds per month
  • VA borrowers can take advantage of competitive, capped mortgage interest rates
  • The steady, phased disbursement of funds helps make budgeting easier during the build process
  • There can be more flexibility around credit score and income requirements thanks to the VA-backed home loan

Overall, these added values combined with your hard-earned military advantage may make home ownership much more affordable and the construction process smooth and easy.


Despite the Many Advantages, Some Challenges Exist

While obtaining a VA construction loan can make the dream of home ownership much more affordable and the construction process smoother, it’s important to note potential hurdles:

  • Finding a private lender that offers VA construction loans can be difficult
  • Not all homebuilders are approved by the VA for construction projects
  • The overall construction loan process can be quite complicated and lengthy

Even with these challenges, a VA construction loan may be worth exploring if you want to build your family’s dream home and leverage your military service. Plus, an experienced VA mortgage lender will help you through the whole process, educating and guiding you each step of the way.


Finance Your New Home Construction with a VA Construction Loan

For eligible veterans and service members, a VA construction loan can provide a useful financing solution to build a custom home from the ground up. If constructing a new home aligns with your goals, take the first step to explore if a VA construction loan is the right solution for you.

This information is intended for educational purposes only. Products and interest rates subject to change without notice. Loan products are subject to credit approval and include terms and conditions, fees and other costs. Terms and conditions may apply. Property insurance is required on all loans secured by property. VA loan products are subject to VA eligibility requirements. Adjustable Rate Mortgage (ARM) interest rates and monthly payment are subject to adjustment. Upon submission of a full application, a mortgage banker will review and provide you with the terms, conditions, disclosures, and additional details on the interest rates that apply to your individual situation.