VA Construction Loan Limits

VA Construction Loan Limits are an amazing tool to consider for anyone who is planning to build their dream home using a VA loan. 

This type of loan allows eligible veterans to build a home with little to no down payment, but there are limits that must be understood. Lenders have limits and requirements when offering VA Construction Loans, such as specific credit score requirements, down payment requirements, and debt-to-income ratio limits. It’s important for borrowers to research and compare different lenders to find the best fit for their needs and financial situation. Afterall getting the best work completed upfront will help you in your investing journey in the future! 

In this blog, we will explore everything you need to know about VA Construction Loan Limits, from what they are, how they work, and how to shop for an approved builder!  

Remember on this journey the of the biggest limitations is the timelines for VA Construction Loans. They can vary greatly depending on a variety of factors, including the complexity of the project, the availability of contractors and builders, and the processing time of the lender and the VA. Talk to your lender about what timelines look like and use this information to make sure you can speak the lender language or at the very least understand what they are saying to you. Understanding verbiage will help you make sure that your build stays on track.

Overall, the timeline for a VA Construction Loan can take several months to a year or more, depending on the preparation, builder selection, loan processing, and construction phases. It’s important to work closely with your builder and lender to ensure that the project stays on track and within budget.

What is a VA Construction Loan?

A VA Construction Loan is a type of home loan that is designed specifically for eligible veterans and active-duty military personnel who want to build a new home. It is offered by private lenders and backed by the U.S. Department of Veterans Affairs (VA), which means that the VA guarantees a portion of the loan in case of default by the borrower.The VA (Department of Veterans Affairs) has a process for approving builders that participate in their VA home loan program. The VA sets standards for construction and ensures that the builders meet these standards before approving them.

To become a VA-approved builder, a construction company must first submit an application to the VA. The application requires the builder to provide information about their experience, financial stability, and ability to meet VA construction standards. The VA will review the application and may conduct an on-site inspection to verify the builder’s qualifications.

The VA Construction Loan encompasses financing for the construction of a new home, including the cost of the land, labor, and materials, and can be used for building a custom home, purchasing a new construction home from a builder, or renovating an existing home. The loan amount is based on the estimated value of the home after construction is completed and will have loan terms from the lender.

One of the benefits of a VA Construction Loan is that it typically requires no down payment, making it easier for eligible veterans and military personnel to qualify for financing. Additionally, the loan terms are typically more favorable than those of traditional Construction Loans, with lower interest rates and longer repayment periods.

What kind of home can I build with a VA Construction Loan?

One of the benefits of a VA Construction Loan is that it can be used to build a variety of different types of homes. You can build a traditional single-family home, a multi-family home, or even a modular or manufactured home. However, there are certain requirements that must be met in order for the home to be eligible for a VA loan. The home must be built on a permanent foundation, and it must meet certain safety and energy efficiency standards.

Some of the different types of homes are:

Custom-built homes: You can use the loan to build a home that is designed to your exact specifications and meets your unique needs and preferences. 

Modular or manufactured homes: You can use the loan to finance the construction of a modular or manufactured home that meets VA guidelines and standards. If you’re using a VA Construction Loan to build a modular or manufactured home, there are several rules and requirements that you must follow. Here are some of the key considerations:

• VA-approved builder: You will need to use a VA-approved builder who meets the Department of Veterans Affairs’ standards for construction quality and safety.
• Permits and zoning: You will need to obtain all necessary permits and comply with local zoning regulations.
• Foundation: The home must be installed on a permanent foundation that meets the VA’s minimum requirements for structural integrity and stability.
• Certification: The home must be certified by a VA-approved inspector to ensure that it meets all applicable building codes and standards.
• Energy efficiency: The home must meet the VA’s requirements for energy efficiency, which may include features such as insulation, windows, and heating and cooling systems.
• Quality standards: The home must meet the VA’s standards for construction quality and durability, which may include requirements for materials, workmanship, and overall construction.
• Warranty: The home must come with a warranty that meets the VA’s requirements for coverage and duration.

It’s important to work closely with a VA-approved builder and lender to ensure that you meet all of the requirements for building a modular or manufactured home with a VA Construction Loan. Not all lenders do these types of loans so ask in your early stages of the relationship. They can help you navigate the process and ensure that you meet all of the necessary standards and regulations.

Spec homes: You can use the loan to purchase a newly constructed home that has not yet been sold or occupied. A newly constructed home is defined as a residential property that has been built and completed in accordance with VA construction standards, and has not been previously occupied or sold to another owner. It’s also important to note that the definition of a newly constructed home may vary depending on the specific requirements of the VA loan program and the state or local regulations governing construction in the area where the property is located. It is typically the in the buyer’s best interest to bring a realtor from outside of the builder organization to ensure that the build is completed and monitored by a third party. Also, in these cases a qualified realtor can help read through the entire contract to help you understand how the builder does business when there are adjustments in the market! A great example of knowing the information is cost of lumber. When the cost went up there were several buyers that were unaware they would be responsible for covering that cost where others had a realtor and had that part of the contract to be rewritten that the builder would cover that cost. Just a healthy way of adding checks and balances to the equation! 

Multi-unit properties: You can use the loan to build a multi-unit property, such as a duplex or triplex, as long as you plan to live in one of the units as your primary residence. The requirement of living in one of the units is in place to ensure that the VA loan program is used to help eligible veterans secure housing for themselves and their families, rather than as an investment opportunity, but you can use it as an investment from the start! Once the property is built, you must occupy the unit that you plan to live in as your primary residence, and you must continue to do so for a minimum period of time (usually one year) as a condition of the loan.

Renovations or additions: You can use the loan to make substantial renovations or additions to an existing home, as long as the improvements will make the home meet VA minimum property requirements.

If you are considering using a VA Construction Loan to make substantial renovations or additions to an existing home, there are several steps you can take to help ensure a successful outcome:

1. Determine the scope of the project: Before applying for a VA Construction Loan, it is important to have a clear understanding of the scope of the renovations or additions you plan to make. This can help you estimate the cost of the project and determine whether a VA Construction Loan is the right option for your needs.
2. Work with a VA-approved contractor: To be eligible for a VA Construction Loan for renovations or additions, you will need to work with a VA-approved contractor who meets the Department of Veterans Affairs’ standards for construction quality and safety. Your lender can help you find a qualified contractor in your area.
3. Obtain all necessary permits: Depending on the scope of your project, you may need to obtain permits from your local building department. Your contractor can help you determine which permits are needed and ensure that all work is completed in compliance with local regulations.
4. Budget for unexpected costs: Renovations and additions can sometimes uncover unexpected issues or costs. It is important to budget for these contingencies to avoid delays or unexpected expenses.
5. Plan for occupancy: If you plan to live in the home while renovations or additions are being made, you will need to plan for temporary living arrangements during the construction period.
6. Plan for the loan repayment: Make sure to have a repayment plan in place before taking a loan, the repayment period for VA Construction Loan is generally longer than traditional loans.

By following these steps, you can help ensure a smooth and successful renovation or addition project using a VA Construction Loan.

Construction VA Loan limits

When it comes to VA Construction Loan limits, there are a few things to keep in mind. If you have full entitlement, you don’t have a limit on the loan. This means that you can borrow as much as you need to build your home, as long as you meet the lender’s requirements. However, if you have remaining entitlement, you do have a home loan limit. This limit is based on the county in which you plan to build your home, and it can vary from one location to another. It is important to work with a VA-approved lender even if you have more entitlement on your COE.

Here are a few key considerations when considering a mortgage with the VA Loan. 

Funding fee: VA loans typically require a funding fee, which is a one-time fee paid by the borrower to help offset the cost of the VA loan program. For Construction Loans, the funding fee is 2.3% of the total loan amount. Starting April 7, 2023, the VA Loan program will offer reduced funding fees as low as 1.5% depending on which usage this is  for loans made to purchase or construct a dwelling with a down payment of at least five percent of the purchase price. This change means that borrowers will pay a lower funding fee compared to previous years. The new fee structure provides a cost-saving opportunity for veterans and active-duty service members who are eligible for a VA loan. It’s important to note that the reduced funding fees will only apply to loans closing on or after April 7, 2023. This information is just a small taste of the new funding fees being released this year, go to our blogs about VA Loans to see updated information and a better understanding of what loan fees are.

Minimum property requirements: The VA has specific requirements for properties that are eligible for VA loans, including Construction Loans. The property must be residential, have a certificate of occupancy, and meet minimum standards for safety, sanitation, and construction quality.

 A few of the minimum property requirements on this type of loan is:

• The property must be safe, structurally sound, and in compliance with local building codes.
• The property must have adequate living space, including bedrooms, bathrooms, and living areas.
• The property must have a functioning heating and cooling system.
• The property must have safe drinking water and a functioning septic system or connection to public sewer.
• The property must have a secure roof and foundation.
• The property must be accessible by a public or private street.
• The property must have no hazards or environmental issues that pose a health or safety risk to occupants.
• The property must have adequate electrical and plumbing systems.
• The property must be free of any significant damage or deferred maintenance.
• The property must have adequate weather protection, such as windows and doors, and be properly insulated.

These are just a few of the requirements for the minimum property requirements on a VA Construction Loan.

Builder requirements: The builder or contractor who will be completing the construction must be approved by the VA and meet certain qualifications, such as being licensed and insured. 

To find builder requirements for a VA Construction Loan, you can visit the Department of Veterans Affairs (VA) website. Here are the steps you can follow:

Go to the VA’s website.

Click on the “Home Loans” tab at the top of the page.

From the drop-down menu, select “Construction and Valuation.”

On the Construction and Valuation page, you will find information on builder requirements for VA Construction Loans. This includes information on the VA’s minimum standards for construction quality and safety, as well as the documentation and certifications that builders must provide to be eligible for VA Construction Loans.

You can also find a list of VA-approved builders on the Construction and Valuation page. This list includes builders who have met the VA’s standards for construction quality and safety.

If you have any questions about builder requirements for VA Construction Loans, you can contact a VA-approved lender. 

Draw inspections: Draw inspections are a key part of the construction process for a VA Construction Loan. A draw inspection is a physical inspection of the construction site and the work completed up to a certain point, usually before the release of funds for the next phase of construction.

During a draw inspection, a qualified inspector visits the construction site to verify that the work completed up to that point is consistent with the plans and specifications approved for the VA Construction Loan. The inspector will document the progress of the construction work and note any issues or discrepancies that need to be addressed.

After the inspection is completed, the inspector will provide a report to the VA-approved lender. The lender will review the report and, if everything is in order, release the funds for the next phase of construction. The process then repeats with subsequent draw inspections at various stages of the construction process.

Draw inspections help ensure that the construction work is completed in accordance with the VA-approved plans and specifications, and that the loan funds are being used appropriately. This helps protect both the borrower and the lender, and helps ensure a successful construction project.

Loan disbursement: With Construction Loans, the loan is typically dispersed in a series of “draws” as the construction progresses, rather than as a lump sum. The borrower will typically need to provide documentation and invoices to show that the work has been completed before the lender will release each draw.

If you have full entitlement, you don’t have a limit on loan

While having full entitlement for a VA loan may make a borrower eligible for a VA Construction Loan, it does not necessarily mean that there is no limit on the loan amount.

VA Construction Loans are designed to help eligible borrowers build a new home or make significant renovations to an existing home. The maximum loan amount for a VA Construction Loan is determined by several factors, some of the factors that the lender would consider when determining the maximum loan amount for a VA Construction Loan are:

• The borrower’s credit score and credit history.
• The borrower’s income and employment history.
• The borrower’s debt-to-income ratio, which is a measure of the borrower’s ability to repay the loan.
• The appraised value of the completed property, which is based on the plans and specifications for the construction project.
• The loan-to-value (LTV) ratio, which is the ratio of the loan amount to the appraised value of the property.
• The cost of construction, including materials, labor, and other expenses.
• The borrower’s down payment, which is typically a percentage of the total construction costs.
• The borrower’s reserves, which are savings or other assets that can be used to make loan payments in case of financial hardship.

By evaluating these factors, the lender can determine the maximum loan amount that the borrower is eligible for under the VA Construction Loan program. It is important for borrowers to work with a VA-approved lender and provide all necessary documentation to ensure that they receive the maximum loan amount they are eligible for.

If a borrower has full entitlement, they may be eligible to borrow up to 100% of the appraised value of the completed property. However, the amount of the loan may still be limited by the borrower’s creditworthiness, the appraised value of the property, and other factors.

Keep in mind, VA Construction Loans are typically subject to Construction Loan fees and interest rates that are higher than traditional VA mortgage loans. These fees and rates can also affect the amount of the loan that a borrower can qualify for.

So while having full entitlement for a VA loan may make a borrower eligible for a VA Construction Loan, there may still be limits on the loan amount based on a variety of factors. Here are some important factors to consider before embarking on a build from the ground up with a VA Construction Loan:

• Your budget: Building a home from scratch can be expensive, and it’s important to have a realistic budget in place before you begin. Consider not only the cost of construction, but also the cost of land, permits, and other expenses.
• Your creditworthiness: Even if you have full entitlement for a VA loan, your credit score and credit history can impact your ability to get approved for a VA Construction Loan and the interest rate you’ll be offered.
• Your timeline: Building a home can be a time-consuming process, and it’s important to have a clear timeline in place for each phase of the construction project. Consider factors like the weather, the availability of materials and contractors, and any other potential delays.
• Your builder: You’ll need to work with a builder who is approved by the VA and has experience with VA Construction Loans. Research potential builders carefully, and ask for references and examples of their work.
• Your plans and specifications: You’ll need to have detailed plans and specifications for your home in order to get approved for a VA Construction Loan. Work with an architect or designer to create a comprehensive plan that meets VA minimum

If you have remaining entitlement, you do have a home loan limit

When applying for a VA Construction Loan, the borrower’s remaining entitlement determines their home loan limit. The remaining entitlement is the amount of VA loan eligibility that the Is the “limit” the amount I can borrow or the amount VA guarantees?

It’s important to understand that the “limit” for a VA Construction Loan refers to the amount that the VA guarantees, not the amount that you can borrow. In most cases, the lender will require a down payment on the loan, which means that you will need to have some money saved up in order to get started on your home building project. In addition to the down payment, there are several fees associated with a VA Construction Loan that you should be aware of.

Firstly, there is a funding fee, which is a one-time payment made to the VA that helps to offset the cost of the loan guarantee program. The amount of the funding fee varies depending on the size of the down payment and whether or not you have used your VA loan benefits before.

Secondly, there are lender fees which include origination fees, application fees, and appraisal fees. These fees can vary depending on the lender you choose and the complexity of your loan.

Thirdly, you will need to pay property taxes and insurance on your new home once it is built. These costs will depend on the location of your property and the value of your home.

Lastly, during the construction process, you may also need to pay for inspections and permits, which can add to the overall cost of the loan.

It’s important to budget for these fees when planning your home building project to ensure you have enough funds to cover all associated costs. Your lender can provide a detailed breakdown of all fees associated with your VA Construction Loan

What is the maximum amount a construction VA loans can be?

The maximum amount that a VA Construction Loan can be is determined by a few different factors.

If you have full entitlement, you don’t have a limit on the loan. However, if you have remaining entitlement, the loan limit will be based on the county in which you plan to build your home. Additionally, the lender will take into account your income, credit score, and other factors when determining how much you can borrow.

What is the max DTI for a VA Construction Loan?

There is no specific maximum debt-to-income (DTI) ratio for a VA Construction Loan. Instead, the VA requires lenders to follow their own underwriting guidelines when evaluating a borrower’s DTI ratio.

However, the VA does have general guidelines for all VA loans, which includes VA Construction Loans. According to these guidelines, lenders are required to evaluate a borrower’s ability to repay the loan based on their residual income, which is the amount of money a borrower has left over after paying their monthly debts.

Lenders typically prefer a DTI ratio of 41% or lower for VA loans, but they may be willing to consider higher DTI ratios in certain circumstances, such as if the borrower has strong compensating factors, such as a high credit score, significant assets, or stable income.

The actual DTI ratio that a lender is willing to accept will depend on the lender’s specific underwriting guidelines and the borrower’s overall financial situation. It’s a good idea to talk to multiple lenders to find the one that best fits your needs and can offer you the most favorable terms.

What are credit score requirements for a VA Construction Loan?

The Department of Veterans Affairs (VA) does not set a specific minimum credit score requirement for a VA Construction Loan. Instead, the VA requires lenders to evaluate a borrower’s creditworthiness based on a variety of factors, including their credit score, credit history, and debt-to-income (DTI) ratio.

Lenders generally prefer a credit score of at least 620 for VA loans, including VA Construction Loans. However, some lenders may be willing to work with borrowers who have lower credit scores, depending on their overall financial situation and credit history.

Even if a borrower meets the minimum credit score requirement, their credit history will still be evaluated to determine their overall creditworthiness. Lenders will look at factors such as late payments, collections, bankruptcies, and foreclosures when making their decision.

In addition, having a higher credit score can help borrowers qualify for lower interest rates and better loan terms, so it’s a good idea to work on improving your credit score before applying for a VA Construction Loan if possible.

Overall, the credit score requirements for a VA Construction Loan will vary depending on the lender and the borrower’s overall financial situation. It’s a good idea to shop around and compare multiple lenders to find the one that best fits your needs and can offer you the most favorable terms.

Why do builders not like VA loans?

There are several reasons why builders may be hesitant to work with VA loans. The biggest is, some builders may not be familiar with the VA loan program, which can make them hesitant to work with borrowers who are using this type of loan. Some of the other reasons builders don’t like the VA loans are:

• VA appraisals: The VA requires a property appraisal to determine the value of the property, and the appraisal must meet certain VA requirements. If the appraisal comes back lower than the purchase price, it can be difficult to negotiate with the seller to lower the price, and the buyer may need to come up with additional funds to cover the difference.
• Closing costs: VA loans have specific rules on who can pay for certain closing costs, and some of these costs must be paid by the seller. This can be unappealing to builders, who may not want to cover these additional costs.
• Delays: VA loans may take longer to close than other types of loans, which can be frustrating for builders who want to move on to their next project.
• Property condition requirements: The VA has certain requirements for the condition of the property, and builders may be hesitant to make repairs or upgrades to meet these requirements.

The great news is, not all builders are hesitant to work with VA loans, and many are happy to work with veterans and their families. It’s a good idea for veterans to shop around and find a builder who is knowledgeable about the VA loan process and is willing to work with them to find a suitable property within their budget. As a VA loan borrower, you have the freedom to choose any VA-approved lender to work with. This means you can shop around and compare different lenders to find the one that offers you the best terms and rates.

In addition to traditional banks and credit unions, there are also online lenders and mortgage brokers who specialize in VA loans. These lenders may offer more flexible terms and a streamlined application process, making it easier for veterans to get approved for a VA loan.

While you have the freedom to choose any VA-approved lender, not all lenders are created equal. Some lenders may specialize in VA loans and have more experience working with veterans, while others may not be as familiar with the VA loan process.

Before choosing a lender, be sure to do your research and compare offers from multiple lenders. Look for a lender who has a solid reputation, offers competitive rates and fees, and is responsive to your questions and concerns. With the right lender, getting a VA loan can be a straightforward and stress-free process.

Here are some ADPI pro tips on VA Construction Loan limits:

• Understand your remaining entitlement: Your remaining entitlement will play a significant role in determining your loan limit for a VA Construction Loan. Make sure to understand how much entitlement you have left and how it affects your loan limit.
• Consider a down payment: If you have limited entitlement or want to borrow more than the county loan limit, you may need to make a down payment to cover the difference. Consider how much you can afford to put down and how it will affect your loan amount and monthly payments.
• Work with an experienced lender: Not all lenders are familiar with VA Construction Loans, so it’s important to work with a lender who has experience with this type of loan. They can help guide you through the process and ensure that you get the best loan terms possible.
• Get pre-approved: Before you start shopping for a home or a builder, it’s a good idea to get pre-approved for a VA Construction Loan. This will give you a better idea of how much you can afford to borrow and help you make more informed decisions during the home-buying process.
• You must find a va-approved builder who is properly licensed and insured!

This blog was written in collaboration with our absolutely amazing DoD SkillBridge employee: Joe