Most aspiring homebuyers decide to purchase an existing house and make it their home. Others yearn for a chunk of land that they can call their own. Whether it’s due to a tight housing market, a very specific wish list, or a strong desire to construct a house from the ground up, building a new home is the only way that some would-be homeowners can transform their dream home into a reality. Fortunately for eligible buyers who want to use a VA loan, buying land with a VA loan is possible.
The Ins and Outs of Buying Land with a VA Loan
Thanks to the backing provided by the U.S. Department of Veterans Affairs (VA), VA loans come with attractive terms that make them understandably appealing, including low interest rates, limited closing costs, and no requirements for mortgage insurance or a down payment. In fact, almost 90 percent of the VA-backed loans used to purchase, improve, or refinance homes are made with no down payment (source). What do potential borrowers need to know about using a VA loan to purchase land?
A Buyer’s Eligibility
VA loans are not available to everyone. They are a benefit offered to active-duty service members, veterans, and others who have served. That is why anyone hoping to use this form of financing must establish their eligibility by obtaining a Certificate of Eligibility. However, simply being eligible to apply for a VA loan is not enough to secure one. Approval is only granted if the eligible borrower also has sufficient income and decent credit for the loan that they are seeking (source).
Much like there are rules about who can use a VA loan, there are strict requirements about the property that can be purchased with a VA loan. In fact, because the VA Minimum Property Requirements include demands for a working bathroom and space for living, cooking, dining, and sleeping and set standards for the soundness of the structure, its utilities, and its mechanical systems, many mistakenly assume that a VA loan cannot be used to buy land. They are wrong.
The third chapter of VA Pamphlet 26-7 outlines the purposes that a VA loan can be used for, and the first item on that list makes it clear that the purchase of land is acceptable if the proper conditions are meant. It states that the loan “may include the simultaneous purchase of the land on which the residence is situated or will be situated.” What if a borrower already owns the land and needs to refinance it in order to build? As long as the value requirements are reasonable, a portion of a VA loan can be used to refinance a land purchase.
Considerations When Using a VA Loan to Buy Land
Clearly, it is possible to use a VA loan to buy land. However, there are rules. Anyone who wants to secure a VA loan to fund the purchase of a vacant property must be prepared to meet certain requirements (source). In most cases, a VA loan to buy land can only be secured in conjunction with a construction loan, and that construction loan must be for a building that will serve as the borrower’s primary residence. While the loan cannot be used to fund a second home or an investment or commercial property, it is possible to buy land and build a structure with multiple units or one that can offer a combination of residential and commercial space. Of course, there are additional rules to follow, and these options are only possible if the borrower intends to make the property his or her primary residence.
What about the rule that any property purchased with a VA loan must meet the VA Minimum Property Requirements? If a borrower is determined to start from scratch, then they must be prepared to submit detailed plans and other documentation to demonstrate that the structure will meet these requirements. The property will also need to pass various inspections, and the builder will need to provide an acceptable guarantee.
Are you considering buying land with a VA loan? PrimeLending of Manhattan, Kansas, can help. Every year, we help thousands of veterans and active-duty members of the military buy or refinance homes through the VA home loan program. With our assistance, you can take advantage of the many benefits of a VA loan while saving money due to our lack of lender fees. We offer 100% financing with competitive interest rates – no down payment or PMI required! To learn more about buying land with a VA loan, please give us a call at 785-560-3011 or contact us online. It’s our turn to serve you!