After learning that VA loans offer competitive interest rates and favorable loan terms, and that they don’t require down payments or mortgage insurance, you’ve decided that this form of financing is the perfect fit for your homebuying plans. Unfortunately, you’re not having much luck finding a house that you actually want to buy. That raises an interesting question: Can VA loans be used to build a house?
Can VA Loans Be Used to Build a House?
The U.S. Department of Veterans Affairs (VA) states plainly that individuals who qualify for a VA-backed purchase loan may use the loan to buy a single-family home. However, that’s far from the only option. They can also buy a condo that is part of a VA-approved project or buy a manufactured home or land. What about those who want to put their own stamp on a home? The VA allows homebuyers to purchase a home and make improvements to it. Can VA loans be used to build a house? Yes, you can use a VA loan to buy land and build a brand-new home or to build your dream home on land that you already own. How does it work?
Using a VA Loan to Build a House
When a VA loan is used to fund the construction of a home, it’s called a construction/permanent home loan. As Circular 26-18-7 explains, there are two types of these loans. As their name implies, one-time close construction loans require a single closing. Borrowers can secure the funding for both the construction of their home and their permanent mortgage at the same time, and everything is agreed to and approved before any work begins. Two-time close construction loans work a little differently. Here, borrowers take out one loan for the construction. Then, they have to secure a second loan and go through a second closing to secure their permanent financing.
How Do VA Construction/Permanent Loans Work?
When you’re buying a home with a VA loan, the house already exists. When you’re building a new home with a VA construction/permanent loan, you’re starting from scratch, so as MilitaryBenefits.info reports, you’ll need to be prepared to jump through a few extra hoops:
- The purchase of the land can be included in the loan, but it must meet specific requirements and be properly documented.
- Your builder must be a licensed, insured builder who is either VA-approved or willing to submit the documentation needed to become an approved builder. Owners are not allowed to serve as builders.
- You and your builder have to submit a complete set of plans and specs with your loan application. This will be used for the VA appraisal. Remember that both the lot and the home should be of a size that would be considered customary for the area. If they’re larger, you may need to make a down payment.
- The VA says that the home should be common in size and design for the area, but the type of home that lenders are willing to approve will vary. Some will only agree to fund stick-built construction. Others may be willing to make loans to build modular homes or manufactured housing. The number of units planned may also be a factor. While a VA loan can be used to purchase a property with up to four units, finding a lender willing to agree to a loan for building a single-family home may be easier than finding one interested in providing a loan for the construction of a multi-unit structure.
- With a construction/permanent loan, the funds are not released as a lump sum. Instead, the bulk of the money is held in escrow. Specific amounts are paid to the builder as milestones are reached.
- Construction closing costs are the builder’s responsibility. However, they can incorporate these costs into their agreement with the borrower.
Are you hoping to use a VA loan to build your dream house? VA construction/permanent loans can be tricky, so be sure that you choose a loan officer who knows the ins and outs of the VA loan program. At PrimeLending: Manhattan, Kansas, we’re loan experts. How can we help you? Contact us today for more information.