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

VA construction loans can help qualified Veterans finance the purchase of land and the construction of a brand new home without a down payment.

A true 0% down VA construction loan isn’t common in today's lending climate. Many lenders, including Veterans United, don’t fund the actual construction of the house. Instead, Veterans United can refinance a construction loan into a permanent VA loan after the construction is complete.

Starting with a standard construction loan and then refinancing into the VA loan is a common route among borrowers and lenders.

When you get a VA construction loan, whether it involves two closings or is bundled into one, the lender or construction loan typically disburses funds to the builder in stages (called draws) as construction progresses. Once the house is finished, you transition to the permanent VA loan.

• For a VA one-time close construction loan, the construction and permanent financing are handled with a single loan at closing before construction commences. The loan automatically converts to a permanent VA mortgage after construction is complete.
• In a two-closing setup, there are two separate closings (and associated closing costs) — one for the VA construction financing and one for the permanent mortgage. In this setup, the second closing finalizes the VA loan, which is used to pay off the short-term construction loan.

Keep in mind, the VA itself doesn’t offer construction loans. A VA construction loan is a loan that private lenders make, and the VA insures the loan.

VA Construction Loan Uses

Veterans can use a VA construction loan to build a single-family home on land they own or plan to purchase. However, the VA has restrictions about using the VA loan to purchase land. Veterans can't buy land with a VA loan unless they immediately begin construction after purchase.

What is the VA Construction Loan Process?

Every homebuyer’s situation looks different, depending in part on the lender they’re working with, the home builder and a host of other factors.

Generally, the process follows along these lines:

Step 1: Find a Lender

This first step can prove challenging. Many VA lenders do not offer financing for new construction. We’ll explore other ways to use your VA loan benefit to build a home in the next section.

Credit score requirements, interest rates and other variables can and often will vary among lenders. If you find a trustworthy lender offering these loans, then you’ll work with them to close the loan before construction starts. That means providing the same kind of income, employment and financial information you would for a traditional VA purchase loan.

Step 2: Find a Builder

The VA doesn’t approve home builders, but it does require them to register with the department and obtain a VA Builder ID. The VA maintains a list of its registered home builders on its Loan Guaranty Hub. You or your builder will provide the construction plans to the lender.

If your builder isn’t registered with the VA, don’t fret — they can register with the VA, usually within five days.

Step 3: VA Appraisal

The lender will order a VA appraisal based on the new build plans and specifications. Soon after, the VA issues the formal Notice of Value listing the home’s fair market value. Lenders will lend the lesser of the home’s acquisition costs and its fair market value. Once this key step is complete and the proposed home meets VA guidelines, your loan can move to closing.

Step 4: Construction

With a true VA construction loan, Veterans close on the loan before the build begins. The lender then makes draws to a builder to cover the stages of new home construction. The builder pays for the closing costs and interest during closing, but they can include these costs in their agreement with the borrower to build.

Step 5: Final Inspection

The VA requires a final inspection when the home is complete. The original appraiser typically conducts the final inspection whenever possible. This inspection ensures the home still meets VA's broad property condition guidelines (Minimum Property Requirements) and was built to the correct plans and specs.

This approach is something we help Veterans with every month. Here’s what you need to know.

Another Option: Starting With Standard Construction and Refinancing Into a VA Loan

Veterans unable to find a lender willing to finance a true VA construction loan can apply for a traditional construction loan and transition to a VA loan after closing.

Getting a traditional construction loan often requires a down payment. However, it may be possible to recoup the down payment in some cases.

When searching for a construction loan, it can pay to shop around. Talk with multiple builders and financial institutions and compare down payment requirements, closing cost estimates and more.

Some builders may have programs or deals, especially for Veterans and military families. Do your homework and make sure you're working with a legitimate builder with a track record of success and satisfied homeowners.

Veterans and military members who own the land they want to build on may be able to use any equity they have toward down payment requirements for construction financing.

Veterans who don't already own land can often include purchasing it in their overall construction loan.

It's important to understand that construction loans are short-term loans. That means Veterans and military members must start working on the permanent financing as early as possible. Ideally, you should communicate with a VA lender from the very beginning, so you’re both prepared to switch to permanent financing once the construction is complete.

Permanent VA Financing for Construction Loans

Lenders can take a couple of different approaches to turn that short-term construction loan into a permanent VA loan. One is to issue a VA purchase loan, and the other is to make a VA Cash-Out refinance loan. Guidelines and policies on this can vary by lender.

From an underwriting perspective, there's little difference between a VA purchase and a VA Cash-Out refinance. In both instances, Veterans and military members hoping to turn their construction loan into a permanent VA mortgage will need to meet the same underwriting guidelines as Veterans purchasing an existing home. This includes meeting requirements for credit score, debt-to-income ratio, residual income and more.

Additionally, similar to a VA construction loan, the home needs to be constructed by a builder with a valid VA builder ID. These aren't hard to get, and it's even possible for Veterans to build the home themselves. Builders often need to provide a one-year warranty.

Lining up a construction loan is a critical step, but you'll need to turn that short-term loan into a long-term mortgage once the home is built. That's not something you want to wait to explore.

New Construction Purchase vs. Cash-Out Refinance

The big difference between VA purchase and VA Cash-Out refinance loans is your ability to get cash back at closing.

With a VA purchase loan, lenders will lend the lesser of the home's appraised value and the total payoff for the home's construction (and the land loan if that amount isn't included in the construction loan).

On a Cash-Out refinance, qualified buyers may be able to borrow up to 100 percent of the home's appraised value. That means Veterans and military members may be able to get cash back at closing from the home's equity, which could help defray the upfront cost of a down payment or other cash outlays.

For example, let's say you put down 10 percent to secure a $300,000 construction loan covering the acquisition of the land and construction of the new home. Subtract the down payment ($30,000), and you're left needing to borrow $270,000 to repay the construction loan.

If the VA appraisal ultimately determines the home's value is $300,000, you might be able to borrow that amount and get back in cash the difference between the appraised value and what you owe ($30,000 in this example).

Guidelines on loan-to-value ratio and other requirements can vary by lender.

Generally, the borrower needs to hold title to the land on which the home is built in order to be eligible for a refinance. Otherwise, Veterans United would treat it as a purchase loan.

Some buyers may jump at this cash-back opportunity, while others prefer to keep building equity and start with the smaller loan balance. Every buyer's situation is different.

Facing Low Inventory, Some Veterans Consider Building

With housing inventory at its lowest level in nearly 25 years, some Veterans and service members are looking at new construction as the ideal way to avoid the low-inventory issue. This issue is still a large barrier for buyers, with 21% citing a lack of housing inventory as a barrier holding them back, according to a recent national survey of Veterans and service members with near-term homebuying plans.

Veterans cited high interest rates and high home prices as the largest barriers to buying a home in Q3 2024, but those figures dropped by eight and six points from Q2, respectively. In fact, every barrier to buying declined in the third quarter except for housing inventory, which remained the exact same—meaning the lack of housing inventory remains a problem for buyers.

Building a new home is one of the top six trade-offs Veterans and service members are willing to make given the inventory shortage, according to Veterans United Home Loans’ most recent Veteran Homebuyer Report, a quarterly national survey of Veterans, service members and civilians who intend to buy homes in the next three years.

Here’s a look at the top compromises Veterans are willing to make:

More Veterans are trying to side-step the inventory issue entirely and use their hard-earned home loan benefit to build a new home. To be sure, it isn’t always an easy road.

It is absolutely possible to use your VA loan benefits for new construction. But the process isn't always simple or straightforward, and some buyers may need money for a down payment to get things moving.