VA Construction Loans, sometimes called the VA One-Time Close Loan (OTC), are for military members who want to build a new home using a VA Loan. With this loan you can buy land (or an existing home) and pay for the planning, developing, and construction of the home all in a single loan product. It’s all done in one so there’s no need to buy land separately with a land loan and refinance to a VA Loan.
You can also include the demolition of an already built house into the cost of the build. If you’re looking to build your dream home from the ground up while still taking advantage of your hard-earned VA Loan benefits, this loan is for you.
Benefits of the VA Construction Loan
There are many benefits to taking advantage of the VA Construction Loan outside of simply being able to build from the ground up. These benefits include:
- Build your dream home on a lot of land where you want to live.
- Be the very first owner of your house.
- Pick the fixtures and features of your home so it’s truly custom for you and your family.
- The demolition of an already built house can be bundled into the loan.
- There is no private mortgage insurance (PMI).
- Because this loan is bundled together, you only need to apply, qualify, and close on a loan once.
The property requirements are the same as those for a normal VA Loan purchase. The builder must also register with the VA in order to be approved. One important thing to note is that this process can be more complicated than a traditional VA Home Loan. Similar to other VA Loans, once you build the home with your VA Construction Loan, it will need to be your primary residence.
Funding fees for the VA Construction Loan
The VA Construction Loan is subject to a funding fee which is added to the total loan. Similar to other VA Loans, these fees are paid to the Department of Veterans Affairs. Funding fees are collected in order to offset the bank or lender's losses if you were to default on your mortgage. For the construction loans, the funding fees are the same as traditional VA Loans and are set at 2.3% for first time users and 3.6% for subsequent use. Exceptions are made when a veteran has 10% or greater disability or an active duty member has been awarded the purple heart
Eligibility and requirements for getting approved
The VA Construction Loan is an incredible benefit available exclusively to military families and veterans. Many military families don’t take advantage of this loan simply because they don’t know they’re eligible. The Department of Veterans Affairs has laid out very specific VA Home Loan eligibility requirements. In addition to active duty members and veterans, there are a few distinct groups that are also eligible.
Members of the Army, Navy, Air Force, Marine Corps, or Coast Guards
- If you served between September 15, 1940-present day
- If you’re active duty and have served
- At least 90 consecutive days during war time
- At least 180 consecutive days during peacetime
- Veterans who served 24 months consecutively and were honorably discharged
- Veterans who were discharged prior to 24 months due to service-related injuries may also be eligible
Members of the Reserves and National Guard
- If you have completed 6 years of honorable service
- Who were mobilized for active duty service for at least 90 consecutive days under Title 10 or Title 32 orders
- If you’ve been discharged due to a service-related injury
- If you met requirements during those years
Surviving Military Spouses
- If you’re an unremarried spouse of a veteran who died while in service or from a service-connected disability
- If you’re a spouse of a military member who is a POW (prisoner of war) or MIA (missing in action)
In order to get started on applying for a VA Loan, you’ll need to obtain two critical things first: your Certificate of Eligibility (COE), and a pre-approval.
- Your COE proves that you’re eligible to use the VA Loan benefits and is the document your bank or lender will need during the homebuying process.
- Pre-approvals are preliminary evaluations of potential borrowers by a lender and determine the buying power of a buyer.
Once you have your COE and pre-approval in hand, you can then continue on your home buying journey and start the fun part, shopping for a home.
What happens next?
Once you’ve obtained your COE through the VA or through your VA-approved lender and have been pre-approved, it’s time to jump into the home buying process.
- Go home / land shopping: this is the fun part! Check out homes / land that work within your budget and have the amenities you’re looking for. You can either build on vacant land or tear down an existing home to build your dream home!
- Submit an offer: once you find the house you’re ready to commit to, it’s time to make an offer and prepare for negotiations!
- Submit updated documents to your lender: this will happen right before you submit an offer that has been accepted. Your lender will supply you with a list of documents to submit and that will get your loan into processing!
- Lock in your interest: once your lender has received your updated documents and the contract, you’ll be given an opportunity to lock in your interest rate. Typically you can lock it in for 15, 30, 45, or 60 days. Be sure to lock your rate for as long as the negotiated escrow period, or longer! Inspections can take a while so don’t be afraid to go with something outside of 30 days.
- Get a home appraisal and home inspection: now that your offer has been accepted, you’ll move forward with the loan process and will begin the inspection and appraisal process.
- Receive approval: after all your documents have been reviewed you’ll receive underwriting approval and can go to closing.
- Close on your home: after you’ve had an offer accepted, gone through the full approval process and all inspections and are ready to go, your lender will clear you for closing!
- Sign your final loan documents and get the keys to your home: Congratulations, you are a homeowner!
Documents that will be reviewed
As mentioned above, your lender will need to obtain very specific documents and verifications to submit to the underwriters in order to complete the loan process and get approval. These documents include:
- Credit report to ensure the borrower has a good credit score and no red flags on past credit like bankruptcy or other financial issues.
- Employment verification to show how much income borrowers have now, and any anticipated additional income as laid out in employment agreements. Documents to help with this include:
- W-2’s from the last two years.
- Pay stubs from the last 30-60 days prior to applying.
- Tax Returns from the last two years
- Asset information including statements from all bank accounts such as checking, savings, and retirement accounts.
- Any additional income asset or liability information like dividends, overtime, pension, child support, etc.
- Renovation plans and permits (as applicable) your lender will review these documents with the underwriting team to ensure that the repairs to the home match the increase value to the home
- Certificate of Eligibility (also known as COE and document specifically needed for VA Loans only) in order to identify a few critical factors specific to veterans and service members. First, the amount of available entitlement for the veteran or military member is determined, then the status of exempt/non-exempt from the funding fee is confirmed and finally the amount of VA monthly service-connected disability compensation is checked.
If all of these documents are checked and approved, underwriters can issue a “clear to close'' which means borrowers are ready to go to the final stage of the process, closing.
What is the VA Construction Loan best used for?
This loan program is best used for eligible military members or veterans who want to build a new home from the ground up or demolish an old one and build a home on that land. This is a great option if you’re looking to be the very first owner of your house and pick the fixtures and features of your home so it’s truly customized for you and your family.
What kind of home can I build?
Every lender that offers the VA Construction Loan will have their own requirements but typically single family homes are the only type of home to be approved for this loan.
Can I be the builder of the home?
The VA technically allows you to be the builder of your own home but due to the risk, most lenders won’t approve a loan if you are your own builder.
What are the costs for the VA Construction Loan?
The costs associated with this loan are comparable to that of a general VA Loan with closing costs ranging anywhere from 2% to 4%. It’s important to note that there could be additional costs associated with plans and permitting that you will want to discuss beforehand with your preferred contractor.