Using a VA Loan to Build a Home
When it comes to getting your dream home, it seems like the only way to get exactly what you want is to build it from scratch. You can customize it to exactly what you need. Want your kids' bedrooms separated by a jack and jill bathroom? No problem. Need a small office den off the kitchen? Done. Want an open concept kitchen? Wish granted.
But getting financing for building your dream home isn't always a dreamy process--even if you're eligible for a VA loan mortgage.
Why? One reason is VA loans typically require you to occupy the home within 90 days and the likelihood you can get your home built in that time with no delays is low.
The second is lenders usually consider building a new house risky because there's always something that could go wrong during the building process that prevents the builders from completing it. And since custom homes are so, well custom, it can be difficult for the bank to find a buyer to finish the home or even buy it after it's completed.
So how do you get around that? Start with a construction loan.
What is a construction loan?
Construction loans are short-term loans that are usually paid off immediately after construction is completed by rolling them up into a permanent mortgage.
For veterans, it's especially important to talk to a lender before you start construction. Although most lenders won't provide VA financing on the construction portion, they'll be able to help you secure a VA loan when your construction is complete. And that means lower interest rates and other financial benefits for you.
Before the bank signs off on the VA loan, expect them to send an inspector to the home to certify that the home is complete and ready for occupancy (remember you have 60 days to occupy the home with a VA loan).
Be prepared with a plan
Unlike a typical home loan, you'll need to be prepared to explain your plan for your construction loan. Your lender is going to want to see you have a clear plan for what you're going to build, how you're going to build it, how much it's going to cost, and what you plan on using the home for after it's built.
For any loan you plan on taking out, you'll want to shop around between different lenders to get the best rates. If you plan on rolling your construction loan up into a VA Loan after the home is complete, you'll want to talk to your potential VA loan lender before you sign your construction loan. That will help ensure that you're meeting all your VA loan lender's requirements and things will go more smoothly after the construction process.
Expect to pay interest on it
Like any loan, you'll need to pay interest on your construction loan--even if you plan on rolling it up into a VA loan once the house is built. The good news is you usually only have to pay interest on the amount of money you've already paid to the builder, not the total amount of the loan. But you should still factor that additional fee into your budget, especially since you're probably also paying for a place to live while your house is being built.
Choose the right builder
You'll need to take extra care to choose a builder with a valid VA builder ID if you plan on using a VA loan after the house is built. That's because you can only get a VA loan on new construction that's built by someone with this ID number.
If you have your heart set on a builder who doesn't have an ID number, you can always ask them to register for one. It should only take a day or two to be issued and only requires the builder to submit three documents to the VA.
What about accessible housing?
Disabled veterans might have unique housing needs like wheelchair ramps or other accessibility features that may add additional costs to the construction project. The Specially Adapted Housing Grant offers veterans up to $70, 465 to outfit their home with whatever they need to suit their disability. You can even find free wheelchair-accessible housing plans from the Plan Collection that your builder can work from.
So, there you have it. Your dream home isn't out of reach--it just takes a little extra planning.
Want to know more about VA loans? We have all the resources you need in our VA loan learning center.