Getting Construction & Land Loans
Getting a traditional construction loan often requires a down payment, although it may be possible to recoup that in some cases. We’ll talk more about that shortly.
When it comes to looking 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.
There are also restrictions about using the VA loan to purchase land. Borrowers can’t use a VA loan to purchase unimproved land with the goal of one day building a home on the site. There are traditional land loans for this purpose, but they typically require a down payment as well.
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 it’s imperative for veterans and military members to start working on the permanent financing as early as possible.
Va Loan Service Requirements:
The amount of required time served in the military varies depending on when the veteran served and under what circumstances the veteran was discharged from the military.
- Must have served at least 90 days in wartime or 181 continuous days in peacetime. That is the general rule of eligibility for veterans that served prior to the early 1980s
- A two-year military service minimum is typically required for veterans who served during and after the early 1980s
- All veterans who are separated from service must have an honorable discharge
In January 2021, Congress amended the law to make Army and Air National Guard members eligible for VA home loan benefits, as long as they have performed at least 90 cumulative days of full-time National Guard duty, 30 of which must have been consecutive. Previously, National Guard members were required to serve for at least 6 years before becoming eligible for a VA loan.
If youre a National Guard member and were previously denied for a VA home loan, now may be the right time to apply again.
Veterans who dont meet these requirements may still be eligible if they were discharged due to a service-related injury, had a qualifying medical condition, the government initiated a reduction of force, and some other circumstances.
Full VA loan eligibility dates of service table
Surviving spouses may qualify for a VA loan if they meet the following criteria:
Can I Use A Va Loan For Vacant Land
The VA Home Loan is incredibly beneficial to qualified military members. Since congress originally created the GI Bill, the VA loan program has facilitated mortgages for some 18 million-service members who in many cases would not have otherwise qualified for a loan. Today the popularity of the loan continues to increase. This past year mortgages purchased with the VA loan are up nearly 8 percent from a decade ago. Furthermore, veterans despite only making up 9 percent of the population equal 10 percent of the housing market. These numbers represent a pressing need for lenders, borrowers and everyone in between to understand every facet of this entitlement program. Among the many misconceptions that exist about the VA home loan is whether or not it can be used to purchase vacant land?
The answer is no, the VA home loan cannot be used to purchase vacant land. As per the US Department of Veteran Affairs regulations, the VA loan can only be used for an existing dwelling. This dwelling must be inspected and appraised prior to the consummation of the loan. Safety and habitability is of paramount importance to the VA. This loan can only be used on property that can immediately function as a primary residence. All properties must have proper water drainage systems, habitable roofs, structural soundness and utilities up to code.
Applicants interested in the VA Home Loan are encouraged to contact VA Home Loan Centers Today.
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Pros And Cons Of A Va Loan
There are a lot of VA benefits that make these mortgages the right choice for veterans. But no loan program is perfect, and even VA loans have their downsides.
|Funding fee adds to overall loan cost|
|Several property types are eligible||Cannot be used for investment properties|
If you have good credit and plenty of savings, you might choose a conventional mortgage over a VA loan. Putting down 20% on a conventional mortgage means you skip private mortgage insurance and the VA funding fee, so youll save money all-around.
And if you have excellent credit, you may score a low interest rate on the conventional loan as well.
New Construction Purchase V 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 whichever is less between the home’s appraised value and the total payoff for the home’s construction .
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 , 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 .
Guidelines on loan-to-value ratio and other requirements can vary by lender.
Generally, at Veterans United, the borrower would need to hold title to the land on which the home is built in order to be eligible for a refinance. Otherwise, we 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.
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Compare A Va Loan To Other Types Of Loans Too
Heres a quick list of comparisons you may want to educate yourself on before you make that final decision:
Va Construction Loans: How To Build A Home With A Va Loan
Building your dream home is a possibility with a VA home loan. But it isnt always an easy road. Here we take a deep dive into VA construction loans and how you can build a home with a VA loan.
Building your dream home is a possibility with a VA home loan. But it isn’t always an easy road.
VA construction loans come with a unique set of challenges making it difficult for qualified borrowers to find lenders willing to do a true $0 down VA construction loan.
While the VA insures a portion of each loan, it’s up to individual VA lenders to determine what kind of loans they’ll issue. And the level of risk in new construction often causes many VA lenders to shy away.
Like many other lenders, Veterans United does not make VA construction loans to build new homes. Whats more common is getting a construction loan from a builder or a local lender and then refinancing that into a permanent VA loan. That’s something we do help Veterans with every single month.
As the homebuilding process wraps up, qualified borrowers can turn that short-term construction loan into a permanent VA mortgage.
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How Much Can I Borrow With A Va Land Loan
Military borrowers have more borrowing power than ever in 2020. The Blue Water Navy Vietnam Veterans Act of 2019 allows VA borrowers to take out a VA loan with no down payment to buy, build or refinance a home above the $765,600 conforming loan limit for high-cost areas.
One caveat: VA construction lenders may set their own guidelines, so check with your loan officer if youre building a home in a high-cost area.
A Note On Finding Va Lenders And Real Estate Agents
Lots of lenders offer VA loans. But they dont all have the same level of experience with them.
And with something as important as buying a home, you want a lender that knows these loans inside and out and understands veterans unique borrowing needs.
For that matter, you want a real estate agent who works often with veterans, too.
Sellers are sometimes wary of VA offers. Sometimes, VAs minimum property requirements and appraised values add roadblocks. A seasoned agent whos done many VA offers will know what it takes to get yours accepted and can give you a realistic path for finding a home.
Before choosing a lender or agent, vet their VA experience . Find out how often they work with veterans and what their records are with getting VA offers accepted and VA loans closed.
You might also ask whether they offer any other types of assistance or support to the veteran community. A company that works closely with veterans and their families, in lending and community service initiatives, is more likely to deliver the experience you need than one that only occasionally closes VA loans.
Before you choose a lender or real estate agent, ask them a few key questions:
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Va Land Loan Eligibility Requirements
With all three of the above land loan options, borrowers still need to qualify for a VA loan. And, for veterans and service members to qualify, they need to meet all of the following requirements:
- Qualify for a VA home loan, as demonstrated by your Certificate of Eligibility
- Meet the VAs and lenders standards for income, credit score, debt-to-income ratio, and any other financial requirements
- Will live in the home as a primary residence youre refinancing from A) a VA construction loan, or B) a conventional construction loan
Unacceptable Va Loan Uses
Unacceptable uses include:
- Purchasing a home as an investment property. Veterans cant use VA financing to purchase a home solely as an investment property. VA loans are designed to fund primary residences for service members.
- Using as a business loan. VA loans cant be used to purchase a storefront, office space or any other non-residential properties.
- Buying unimproved land. Veterans cant use VA loans to purchase bare land or farm ground that does not contain the borrowers primary home. You also cant buy land with the intent of someday putting a house on it.
- Buying abroad. VA loans can only be used for properties in the United States and its territories, which include American Samoa, Guam, the Northern Mariana Islands, Puerto Rico and the U.S. Virgin Islands.
Its important to know that lenders are free to add their own property restrictions to this list. For example, many VA lenders wont offer financing for manufactured homes . Others will decline to lend on properties like a working farm or a geodesic dome. Acceptance or denial from one lender does not necessarily translate into acceptance or denial from all lenders.
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Mobile And Manufactured Homes
Veterans can also buy a mobile home, or a manufactured home, through the VA program, though not all lenders will finance mobile homes since they can be risky investments for lenders their value decreases over time. Getting a VA loan for a mobile home is more feasible if you own the land where your mobile home will be parked. Also, mobile and manufactured homes must be affixed to their foundations – no ifs, ands, or buts.
Prefabricated, or modular, homes are easier to finance through VA loans than mobile homes. These homes are built at a factory in sections and then put together on site by a contractor. Modular homeswhich must be attached to a permanent foundationare more likely to appreciate than mobile homes.
Is A Va Loan Worth It
If you stack up a VA loan against a conventional mortgage, youll see that despite the benefits, when it comes to the cold hard cash, youre best going with a conventional loan!
Youd have a better interest rate at around 3.6%, and you would also have no PMI.8 And youd really see the savings when you looked at the interest paid over the life of the loan.
So, what if you decided to save up a 20% down payment on a $200,000 home and went with a 15-year fixed-rate conventional mortgage instead?
Lets compare the numbers. Well use a current interest rate on a 15-year VA loan of around the 4% mark.9
With a 15-year fixed-rate conventional loan, your total interest paid is $48,156thats almost $20,000less than what you would pay in the VA loan example!
When you factor in the loan amount, the funding fee, and the total interest paid, the entire cost of the VA loan is $272,013. So youre paying more over the course of the 15-year term compared to a conventional mortgage. Think of what you could do with all the money youd save!
The bottom line is this: VA loans are usually one of the most expensive ways to buy a home. If you have to take out a loan in order to buy a home, go with a 15-year fixed-rate conventional mortgage with a 20% down payment to avoid paying PMI. Outside of buying your home with cash, its the best way to go.
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How Does A Va Loan Work
VA loans work a bit differently than conventional mortgages. The Department of Veterans Affairs does not make or originate loans, but backs a portion of each loan against default. This backing, or guarantee, is what gives private lenders the confidence to extend $0 down financing and advantageous rates and terms.
However, from a process perspective, VA loans work fairly similar to most other mortgage options, but with a few caveats. A typical VA loan process works something like this:
Who Is Eligible For A Va One
As with any VA loan the borrower must be a qualifying active duty member of the U.S. military, veteran, or surviving spouse. A Certificate of Eligibility is required. Other requirements of this program include:
- Borrower cannot perform any of the work
- Builder must provide a one-year VA Builders warranty
- General Contractor must be registered with the VA
- General Contractor must carry sufficient insurance through a current general insurance liability policy
- VA regulations require periodic inspections of properties under construction
Borrowers will also need to meet the income, asset, and minimum property standard requirements of VA loans. Eligible property types include the following, and must be the borrowers primary residence:
- One-unit stick built house
- New manufactured double or triple wide housing
- Modular homes
Inspections are conducted during the construction process to ensure that all onsite and offsite improvements have been acceptably completed according to the construction exhibits on which the VA value estimate is based, and meet the VA Minimum Property Requirements .
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Next Steps For A Va Construction Or Va Rehab Loan
There is no central list of lenders who issue VA home loans. And, everyones home buying needs are different. The best way to find the right loan and lender for you is to shop around and compare rates from multiple lenders.
Please contact our support if you are suspicious of any fraudulent activities or have any questions. If you would like to find more information about your benefits, please visit the Official US Government website for theDepartment of Veteran Affairs or the US Department of Housing and Urban Development.
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Financing Renovations On Your Existing Home
Its much easier to finance fixing up a home you already own than one youre buying. Of course, you still wont be able to borrow more than 100% of the appraised market value of your home. But, if you have equity, youll likely be able to get a VA cash-out refinance. You can spend some or all of the proceeds of that loan on home improvements.
For a VA cash-out refinance, youll have to qualify for the loan like you did with your purchase loan income documentation, appraisal, and a minimum credit score. Most lenders are happy with a minimum credit score of 620 or higher, though some will consider lower.
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