What goes into a VA construction loan
A VA one-time-close construction loan covers your lot, the build and your permanent mortgage with one loan and one closing. The loan amount is built from the pieces below, and these are the same pieces any VA construction loan estimate adds up.
| Piece | What it is | How it’s figured |
|---|---|---|
| Cost to build | Your builder’s fixed-price contract. | The contract price. Everything needed to finish the home has to be in it. |
| Your lot | The land the home is built on. | Buying the lot: the purchase price goes into the loan. Own it but still owe on it: the payoff goes into the loan. Own it free and clear: nothing is added, and your equity can count toward the deal. |
| Contingency | A 2% cushion for unexpected costs, like higher material prices, weather delays or change orders. | A percentage of the cost to build. Any amount not used goes toward your principal when the build is done. |
| Interest reserve account | An account set up at closing that pays your interest-only payments during the build. | Based on the loan amount, the 12-month construction period and how the builder draws funds over the build. It’s funded as part of your loan amount. |
| Construction management fee | Covers running the loan during the build: inspections, builder draw requests, change order approvals, and coordination with your builder and the title company. | Part of the loan amount, paid by your builder through the loan. |
| VA funding fee | A one-time fee paid to VA that keeps the home loan program running. | A percentage of the loan, added to the loan amount. $0 if you receive VA disability compensation. |
No payments during the build
You won’t make a mortgage payment while your home is being built. The interest reserve and the construction management fee are part of the loan amount and paid by your builder, because VA doesn’t allow the Veteran to pay them. During the build, your interest-only payments come out of the interest reserve account automatically.
Any contingency or interest reserve that isn’t used becomes a principal reduction when the loan is modified after the build, which can lower your payment.
VA funding fee for construction loans
VA construction loans use the same funding fee as a VA purchase loan. It depends on your down payment and whether you’ve used your VA loan benefit before.
| Down payment | First use | After first use |
|---|---|---|
| Less than 5% | 2.15% | 3.3% |
| 5% to less than 10% | 1.5% | 1.5% |
| 10% or more | 1.25% | 1.25% |
Veterans who receive VA disability compensation, at any rating, don’t pay the funding fee.
Your monthly payment after the build
Construction takes 12 months. When the home is finished, the loan becomes your permanent VA mortgage at a fixed rate. The 12-month build counts toward the loan term, so a 30-year loan has 348 monthly payments and a 15-year loan has 168.
Your monthly payment is made up of:
- Principal and interest on the full loan amount at your permanent rate.
- Property tax, figured on the appraised value of the finished home.
- Homeowners insurance.
- HOA dues, if the home is in an HOA.
There’s no monthly mortgage insurance on a VA loan.
Down payment, appraisal and credit
VA doesn’t set a minimum credit score or a maximum loan amount for borrowers with full entitlement. These are the program guidelines Shirley’s team uses for VA construction loans:
- $0 down up to $1 million. Loans over $1 million (up to $2 million) need 5% down, and equity in a lot you already own counts toward it.
- The appraisal has to support the whole project. The finished home needs to appraise for at least the total of the lot and the build.
- Credit: a 620 minimum credit score, and larger loan amounts may need a higher score.
Get your real numbers
Every piece above depends on your builder’s contract, your lot and the appraisal. Shirley’s team builds a full itemized estimate from your actual numbers, so you can see your total loan and your payment before you sign a build contract.
See the construction loan journey for every step from pre-approval to move-in, or read the full VA construction loan guide.
Related
Construction loan journey
Every step, for veterans and builders
Open →DTI & residual income calculator
Will I qualify?
Open →VA construction loan guide
How building with $0 down works
Open →Construction loan questions
What is an interest reserve on a VA construction loan?
Money set aside in the loan to pay the interest while your home is being built, so you make no construction payments out of pocket. Any interest reserve that isn’t used becomes a principal reduction when the loan is modified after the build. The calculator estimates it for you; Shirley’s team can walk you through exactly how yours is sized.
What is the contingency on a construction loan?
A cushion of 2% of the cost to build, set aside for overruns and approved change orders. Any contingency that isn’t used is applied to your principal when the loan converts after the build.
What does the construction management fee cover?
Managing the build: draw requests, inspections and paying the builder as work is completed. Shirley’s team can explain your exact fee on a quick call. Everything needed to finish the home must be included in your builder’s fixed-price contract.
Can I build with $0 down on a VA loan?
Yes, when the home appraises for at least the total project cost. Construction loans over $1,000,000 require 5% down.
