Land Loans for veterans can really be a journey that has many rewards attached to it and can help a veteran or their family member realize their dreams! For many veterans, the dream of owning a their land can seem a distant reality, hindered by financial barriers and complex loan requirements.
Thankfully the Department of Veterans Affairs (VA) has programs specifically designed to assist veterans in purchasing land and realizing this dream. Getting the knowledge base to understand how a VA land loan works, and what the requirements are is the first step in deciding if a VA land loan is a good idea and a good fit for your future goals.
Can You Use a VA Loan to Buy Land?
Yes, you can. The VA offers a variety of loans to veterans, including those that allow for the purchase of land. However, the VA land loans, or “Lot Loans,” are not as widely known or utilized as the regular VA home loans. These land loans are not standalone; they are generally connected with a construction loan that allows for the building of a home on that land.
Let’s talk about what a construction loan looks like, and remember this will be coupled typically with the VA land loan.
Construction loans are specifically tailored to finance the cost of building a new home or a significant renovation project. They have a unique structure that accommodates the unique nature of construction projects. Here’s an overview of how these loans typically work:
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Loan Term:
Construction loans are usually short-term, typically one year or until the construction is completed. After construction, they are often converted into a traditional mortgage, referred to as “construction-to-permanent” financing.
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Interest Rate:
Interest rates on construction loans can be variable or fixed, but most are variable, tied to a benchmark rate like the prime rate. Because construction loans are considered somewhat risky, they usually come with higher interest rates than traditional mortgages.
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Draw Schedule:
One unique aspect of construction loans is the draw schedule. The money isn’t disbursed all at once, but in a series of “draws” or installments. Each draw corresponds to a construction phase. For instance, the first draw might cover land acquisition, the second the foundation, etc. Before each draw, an inspector typically verifies that the previous phase was completed correctly.
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Interest-Only Payments:
During the construction phase, borrowers usually only have to pay interest on the amount of money that has been drawn. This is the part when you want to pay attention and be intentional to learn about the fact that none of your payment decreases the overall amount of your loan. This allows the borrower to have smaller payments during construction, when they may also be paying for other housing. Many people take this option because it is difficult or an unwanted stressor to have both the house you are living in and the house you are building.
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Loan-to-Cost Ratio (LTC):
Lenders often rely on the Loan-to-Cost ratio in construction loans. The LTC ratio is a measure of the loan amount as a percentage of the total project cost (including land, construction, and sometimes even closing costs). Lenders typically provide a loan for 75%-80% of the project cost, with the borrower responsible for the rest. What does this mean for you? This typically makes it to where you will need to have money on hand.
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Construction Contingency:
Lenders often require a contingency reserve, typically around 5-10% of the construction costs, to cover unexpected expenses during construction. If the reserve isn’t used, it can be applied to the mortgage balance when the loan is converted.
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Conversion to Permanent Mortgage:
Once construction is completed, the loan either becomes due in full or is converted to a permanent mortgage. If the loan is construction-to-permanent, the transition is relatively seamless, and the interest rate and repayment terms for the mortgage phase are typically set when the loan is initially closed.
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Builder’s Qualifications:
Finally, the qualifications of your builder can also affect your loan. Lenders prefer and in many cases require you to work with licensed, bonded builders with a solid reputation and track record.
Each lender may have different specifics, so it’s crucial to thoroughly understand the terms and conditions of your construction loan. It’s often beneficial to work with a lender experienced in these types of loans, as they can guide you through the process.
So, you may be stopping here and wondering why I started telling you about a construction loan. The truth is because it is pertinent that you understand both the VA land loan and have a plan for a construction loan also. Your research so consider both of these loans and the education that goes with both of them to ensure that your end product is a property that is fully researched, stays on schedule and you are able to manage the build.
Veteran Eligibility
Before jumping into the specifics of VA land loan requirements, it’s important to understand who is eligible. VA loans are only available to veterans, active-duty service members, and eligible spouses. You must have served at least 90 consecutive days during wartime, 181 days during peacetime, or 6 years in the Reserves or National Guard.
VA Land Loan Requirements
The VA has a list of requirements for land loans, which are more detailed than for regular home loans. These include, but are not limited to:
- – The land must be intended for residential use and not income-producing property.
- – There should be a plan in place to begin construction within a reasonable timeframe.
- – The property must be properly zoned for residential use.
- – All local and state building codes must be adhered to.
Rules for Buying Land & Constructing a Property
Remember, VA land loans cannot be standalone loans. Therefore, if a veteran is buying land with a VA loan, they are required to also obtain a construction loan for building a house on that land. Typically, the VA requires that construction begin within one year of closing on the loan. One year is what would be considered a reasonable amount of time in most cases but you should talk to your lender about what proof must be provided. It is key that you write everything out and go over all loan documents to understand what you will have available when. Your contract should be a VA qualified builder and also understand the permits necessary for the local area you are building in.
How VA Land Loan Financing Works
The VA guarantees the land loan, meaning they agree to pay back a certain amount of the loan if the borrower defaults. This reduces the risk to lenders and encourages them to offer more favorable terms. VA land loans usually cover up to 100% of the land’s value, but exact terms depend on the lender. When shopping for a lender that will support a VA land loan and a construction loan ask what their favorable terms are for when the house is fully constructed and you get the owner occupancy certificate. Understanding what products they have for a full 30 year mortgage at the end of the build can really help save you money and hassle in the long run.
Alternatives to VA Land Loans
If a VA land loan is not the best option, veterans can consider other alternatives such as traditional land loans, USDA loans for rural land, or seller financing. These alternatives come with their own pros and cons, and it’s essential to research thoroughly to understand what fits your financial situation best.
How Often Do Lenders Fund VA Land Loans?
Depending on the structure of your proposal many lenders are able to offer land loans but many will not move forward without proof of funds and or intent to build, again with proof of a plan.
Why VA Loans for Land and Construction Aren’t Common
Though VA loans for land and construction are available, they’re not common. The reason being, these loans involve more risk for lenders, and many lenders are not equipped to manage construction loans. As a result, it may be harder to find a lender that offers VA land loans, but they do exist.
Farm Loans for Military Veterans
For veterans interested in agriculture, the VA also supports residential farm loans. These loans can cover land, livestock, equipment, and other farm-related expenses. Additionally, the USDA provides the Farm Service Agency (FSA) Direct Farm Ownership loan, which is another great option for veterans. Again the bottomline is the land must have a plan for the veteran or qualified person to occupy and or build to occupy on the land. There are many different details to learn about when a VA loan will be used to buy a farm.
ADPI Pro Tips
- Work with a lender experienced in VA land loans.
- Make sure to fully understand the terms and conditions of the loan.
- Start planning for construction as soon as possible.
- Always have a clear residential intent for the land.
