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VA Land Loans: How They Work

Jennifer Calonia

If you're looking to buy land to design and build your dream home, a VA loan with no down payment might make this idea even more appealing. But you need to be ready to build if you plan to use a VA loan.

You can't take out a VA land loan without an existing home on the lot or a new construction plan prepared.

Can You Buy Land With a VA Loan?

Eligible military members and veterans can purchase land using a VA loan, but there has to be a home involved.

The purchase must meet certain requirements. VA land loans must be used toward:

-- The construction of a new home on land you already own.

-- Land that already has a residence on it.

-- The purchase of land that you're constructing a new home on simultaneously.

-- The purchase of farmland with an existing residence that you plan on residing in.

"VA loans have to be used to buy dwellings that can be immediately used as primary residences," says Rich Carey, an active-duty member of the Air Force and founder of Rich on Money, a military and veterans finances blog. "The dwelling has to be inspected and appraised prior to getting the loan."

[Read: Best VA Loans.]

How Often Do Lenders Fund VA Land Loans?

While the Department of Veterans Affairs offers a guarantee for land loans under certain circumstances, that doesn't necessarily mean you'll find a lender willing to extend this type of loan.

Under a new construction loan, the VA holds the lender responsible for several elements of the construction. This includes disbursement of funds, managing and tracking the progress of the construction, and ensuring that the completed construction adheres to the approved builder's plans and specifications.

"The problem is, it is almost impossible to find a lender that will give this loan (land plus new construction), even though it is technically allowed and guaranteed by the VA," says Carey. "Lenders don't like the risks involved with new construction. If there is a downturn in the market, new construction usually feels it first and heaviest."

VA Land Loan Alternatives

These are your options for buying land using your VA benefit.

VA Construction Loan

One way to use your VA loan for land is with a VA-backed new construction loan. Before searching for a VA-approved lender to submit an application, you'll need to work with a VA-approved builder to develop construction plans and specifications for your new home.

[Read: Best Home Improvement Loans. ]

When you have the details ready, you can apply for a new construction loan with a lender. The builder will need to supply the completed plans and specifications, and will need to fill out documentation on the land and surrounding area, and materials being used for the construction.

VA new construction loans allow for two loan options.

A one-time close construction loan closes the VA-backed construction loan and the permanent VA loan before construction starts, and modifies terms of the permanent financing after the final inspection of the completed project.

A two-time close construction loan closes the first, non-VA loan before construction starts. When the construction is complete, you'll refinance the original loan into a VA-backed loan and go through a second closing process on the new loan.

VA Farm Loan

You're allowed to use your VA entitlement to purchase a farm, too. There are a few differences between using a VA loan for a farm compared with a traditional single-family home.

The farm needs to have an existing residence or you need to have plans to build a residence on it. Choose a home and sign a purchase agreement with the seller or a contract with a builder. You must also intend on living on the farm as your primary residence. It can only be used for residential purposes (not for business), which can make it difficult getting approved for a VA farm loan.

"Property values are also assessed in the same way as a single-family home," says Ryan Guina, founder of TheMilitaryWallet, a personal finance and benefits resource for the military community. "However, nonresidential property improvements such as pastures, stables, barns, sheds or corrals can be included in the assessment at fair-market value."

[Read: Best Debt Consolidation Loans.]

The appraisal value of the land won't include any livestock, crops, farming equipment or supplies.

Additional Restrictions When Using a VA Loan for Land

Finding a lender that will work with you on this type of loan may be challenging. But even before that step, you'll need to ensure you're qualified for a VA loan in the first place.

Meeting the service requirement is key to qualifying for a VA loan, but lender requirements and land restrictions are also a hurdle you'll need to address. Here are just a few conditions to be aware of when purchasing land with a VA loan.

Your income and credit matter.
The VA loan program doesn't set income and credit restrictions. Private lenders, however, have qualification requirements VA loan borrowers must meet. These requirements include credit rating, debt-to-income ratio and proof of income that shows you can afford the monthly payments.

The land must meet all requirements.
Land for a new construction loan is held to the same minimum property requirements as an existing home purchase. This includes conditions in and around the land, including:

-- Testing the land for radon gas.

-- Verifying the site allows for proper drainage.

-- Checking topography and geological factors for hazards.

-- Confirming noise and safety-related zones if near an airport.

All of these requirements are assessed during the inspection process. If the land doesn't clear the minimum property standards, it's ineligible for a new construction loan.

The builder for the construction must be VA-registered.
The builder for your home construction must be registered with the VA, in addition to being licensed and insured. To register, the builder must submit a few forms to the VA:

-- Builder information and certification.

-- Equal Employment Opportunity Certification.

-- VA Affirmative Marketing Certification.

To confirm whether a builder is already registered with the VA, you can use the Veterans Information Portal.

Should You Get a VA Loan to Buy Land?

VA loans can be used to buy land as long as you plan to live in a home on the property and meet other requirements of the program. Your VA benefit could help you save money, so for many service members and veterans, VA loans are a good mortgage option.

Though you may be eligible, your credit still needs to qualify for the loan. The stronger your credit score, the better your chances of getting approved for a VA land loan with a competitive interest rate.

"The VA only guarantees a portion of the loan. They do not make the actual loan," Guina says. "The VA doesn't set a minimum credit score requirement for borrowers." That's up to the lender to determine.

"That said, because the VA guarantees a portion of the loan, many banks offer VA loans at slightly lower interest rates than a comparable conventional mortgage," Guina says.

With no down payment required and no private mortgage insurance needed, using a VA loan to buy land might sound enticing. However, before making a decision, think about how you plan to use the land and ensure it would be within the limitations of this VA benefit.



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