Can You Buy Land With A VA Loan?

    Can You Buy Land With A VA Loan?: What You Need & How To Do It

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    The Department of Veterans Affairs offers many different types of assistance to former military and active service members, including healthcare, disability, life insurance, education, employment, and more. But the biggest benefit is, arguably, also the most overlooked: VA home loans.

    Despite a lower interest rate and flexible credit score requirements, only 13% of veterans have taken advantage of their home loan benefit. And almost one-third don’t even know that they have this benefit to begin with! 

    If you’re one of the many veterans that aren’t familiar with the ins and outs of the VA loan program, this guide is here to help. We’ll answer the following questions:

    • What is a VA home loan?
    • Who can take out a VA loan?
    • Do you have to buy a house with your VA loan, or can you use it to buy land?
    • What are the requirements for using a VA loan for construction?
    • If I can’t get a construction VA loan, what are the other available options for home financing?

    What Is A VA Loan?

    A VA loan is housing assistance provided by the Department of Veterans Affairs. There are two main types: 

    • A VA direct home loan is where the Department of Veterans Affairs serves as the lender.
    • A VA-backed home loan where you get a loan from a private lender (like in a conventional mortgage) but the government guarantees a portion of it, resulting in a lower interest rate and more favorable terms.

    The most popular type is a VA-approved home purchase loan, which allows qualified borrowers to buy or build a new home. Most people use VA loans to buy an apartment or house, but you can also use it to purchase a fixer-upper or make a current home more energy-efficient.

    There are even cases in which you may be able to use VA home loans to buy land. However, you have to meet several conditions for it to be an eligible purchase. We’ll get into the details of that in just a bit.

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    How Much Can You Borrow With A VA Loan?

    The maximum amount you can borrow depends on your VA entitlement. VA entitlement is the amount that the government will pay if you can’t make your monthly mortgage payments. You can find out what your VA entitlement is by getting a certificate of eligibility (COE).

    If you’re eligible for a VA loan, the basic entitlement is worth up to 25% of your loan amount or $36,000, whichever is lower. Of course, this doesn’t mean that $36,000 is the limit – many lenders will lend you up to $144,000, or four times the basic entitlement. 

    You may also be eligible for a bonus entitlement, which allows you to borrow beyond the established conforming loan limit of $510,400. The bonus helps you buy more expensive homes or even purchase a secondary residence. 

    What Are The Benefits Of Using VA Loans?

    Why would you want to use a VA loan over other types (e.g. FHA, conventional, etc.)? Here are some of the advantages:

    No Down Payment

    Most lenders require you to cough up at least 20% of the sale price before you can apply for a mortgage. The biggest draw of a VA-approved loan is that you don’t need to meet that requirement to buy property. In fact, around 90% of veterans that use a VA loan don’t put down any payment at all. This means that you can become a homeowner sooner without having to spend years saving up first. 

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    More Favorable Rates & Terms

    With conventional home loans, your interest rate and payment terms are determined by how much of a financial risk you pose to the lender. This is to protect them in case you default on your payments. 

    VA loans are guaranteed by the government, which means that they will pay a portion of your debt in the event that you can’t. This enables lenders to offer a lower interest rate to eligible veterans.

    You save money in other ways too. The VA limits the closing costs that lenders can charge. The maximum that they can tack on is 4% of the total price.

    Looser Requirements

    Conventional loans have very specific eligibility requirements. You’ll need to have at least 3.5% down (and as much as 20% for most home loans), a minimum credit score of 620, proof of income and employment for the last two years, and a debt-to-income ratio of 45% or less.

    A VA loan is much easier to qualify for. Aside from the no-deposit requirement, there’s technically no minimum credit score to take advantage of this benefit. Plus, lenders don’t look at your overall income – instead, they look at your residual income, which is how much is left over after taxes and major household expenses. However, you should keep in mind that VA mortgage lenders might have their own requirements. 

    Insurance Not Required

    You traditionally can’t get a mortgage without a 20% down unless you have mortgage insurance, which is just another expense tacked onto your monthly payments. In contrast, VA loans allow you to purchase property even without any upfront payment or insurance. This makes it a much more affordable option both initially and in the long run.

    Your Choice Of Lender

    Although the VA offers direct home loans as well, you can opt for a VA-backed mortgage instead. That means that you can shop around for your preferred lender, allowing you to get the best rates possible. You can find VA loans at your local banks, credit unions, neighborhood organizations, private mortgage providers, and other financial institutions. 

    Shorter “Recovery” Time

    If you declare bankruptcy or foreclose your home, you become ineligible for any type of loan for 3-4 years. But with a VA loan, that recovery period is reduced to just 2 years. You might also be able to file for bankruptcy protection, which reduces that even further to 1 year.

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    Fee Waivers For Eligible Veterans

    The VA charges a “funding fee” instead of mortgage insurance if you don’t have a down payment. This comes in the form of a one-time flat fee, starting at 2.15% of the loan amount.

    However, not all veterans are required to pay for this. For example, if you have disabilities as a result of your military service, you can request a waiver of the funding fee.

    Assumable Mortgage

    The good news is that VA-backed home loans are assumable by someone else, which means that they can take on your mortgage if you decide to sell your home before you’ve fully paid off your debt. The lower interest rate and better terms make your property more marketable to potential buyers, especially if the housing market goes up. 

    It’s important to note, however, that you won’t be able to take out another VA loan unless the person who assumes your VA-backed mortgage is also an eligible veteran.

    Who Is Eligible For A VA Loan?

    When you approach a third-party lender for a VA loan, they will ask you for a certificate of eligibility (COE) as proof that you qualify for the benefit. To get a COE, you need to meet certain requirements.

    Here’s a breakdown of who can take out a VA loan.

    Note: These are the minimum requirements as laid out by the VA. Your preferred lender may have additional requirements you will also need to meet.

    Veterans & Active Service Members

    • You meet the minimum active service requirement based on VA guidelines. Most require you to have served 90-181 days, depending on which tour you were called on.
    • You did not meet the minimum service requirement, but you were discharged for a service-related disability.
    • You did not receive a bad conduct, other than honorable, or dishonorable discharge. 
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    National Guard & Reserve Members

    Members of the National Guard and Selected Reserve may also be eligible for a VA loan if you meet the following conditions:

    • You served at least 90 days of active duty service.
    • You did not serve in active duty, but you were a part of the National Guard or Selected Reserve for 6 creditable years.
    • You were discharged honorably, placed on a retired list, or transferred to the Standby Reserve or an element of the Ready Reserve.

    Discharge Exceptions

    If you were discharged for any other reason than disability, you might still qualify for a VA-backed loan. However, you must have been discharged for one of the following reasons:

    • Hardship
    • Early out (must have served at least 21 months out of a 2-year enlistment)
    • Reduction in force
    • Qualified medical conditions
    • Convenience of the government (must have served at least 20 months out of a 2-year enlistment)

    Military/Veteran Spouses

    You can apply for a COE if you are a spouse of a veteran who:

    • Was killed in war
    • Is declared missing in action
    • Is being held as a prisoner of war
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    Other Eligibility

    It’s possible to get a COE without meeting the above requirements. An exception is if you’re an American citizen who served in the military of a government that was allied with the United States in World War 2. Another exception is if you served as a member in specific organizations, such as the United States Naval Academy, National Oceanic & Atmospheric Administration, or Public Health Service.

    Can You Purchase Land With A VA Loan?

    Most people use VA home loans to buy a new home or refinance a non-VA loan into the VA program. You don’t have to make a home purchase outright, though; it’s possible to buy land with it as well. But there’s a major caveat: you can’t use it to buy land only. 

    The VA loan program is designed to help veterans purchase a primary residence. No primary residence, no mortgage. If you’re using a VA to purchase land, you must also construct a home simultaneously. This is called a VA construction loan. You can’t take out a VA loan if you want to buy land now and construct something on it later.

    Here are a few scenarios in which you can use a VA loan to buy land:

    • You have existing land and want to build your primary residence on it.
    • You want to purchase land that already has a residence on it.
    • You want to buy empty land and have plans for new construction.

    You cannot buy investment property, farmland that doesn’t have a residence on it, property in a foreign country, or a vacation/second home.

    There are two types of new construction loans: a one-time close construction loan and a two-time close construction loan. 

    A one-time construction loan requires you to take out two home loans at once: the new construction loan to finance the building, and the permanent loan that acts as your mortgage. When construction is completed, the first loan is refinanced into the other.

    A two-time construction loan also requires two home loans, except that you apply for them separately. This allows you to get better rates and more flexibility with your mortgage options. The new construction loan is then refinanced into your mortgage once your home is finished.

    If you’re using a VA loan to finance your house and lot, you must complete the construction. If you don’t, the VA may not back the entire loan. 

    Requirements For VA Loans (Construction & Property Restrictions)

    The property you buy must also meet specific requirements if you want to use VA loans for construction. A VA construction loan will only be granted if:

    • You will live on the land you’re buying.
    • The property is accessible through a public or private street. There must also be backyard access.
    • You will maintain any private roads.
    • You’re buying a maximum of 4 units, which means that there should be more than 4 separate residences on the land. Each unit has to have its own utilities (e.g. electricity, sewage, water, gas, etc.).
    • The home will have a fixed/permanent foundation.
    • You’re not buying more than 20 acres of land.
    • The property meets other minimum property requirements as laid out by the VA.
    • The land is not near a hazardous waste facility, dump, landfill, and other environmental hazards.
    • The land is not vulnerable to sinkholes, earthquakes, floods, landslides, and the like.

    You must also work with a VA-registered contractor if you’re planning to take out a new construction loan.

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    How To Purchase Land With A VA Loan

    There are three ways that you can use your VA loan to purchase land and build your new home:

    • VA-only: Use the VA new construction loan to finance the entire home purchase, including the land and the construction. You need to build a home at the same time that you acquire the land, not later. 
    • Split loans: Finance the land purchase through another type of loan. Then, use the VA loan to build your home.
    • Refinance: Finance both the land purchase and new home construction with a different type of loan. Then, once the home is completed, refinance it into a VA loan.

    When you’ve decided on how you will go about it, you can begin the long and arduous process of becoming a homeowner. Here’s the process 

    1. Get your documents together: The most important document that you’ll need is your COE, which states that you qualify for a VA-backed home loan. This is on top of the other requirements that lenders may ask for, such as your credit score or proof of residual income.
    2. Get your VA loan: When you find a lender that offers new construction loans with the VA, the next step is getting approved. You have to meet both VA and lender minimum mortgage requirements to secure a loan.
    3. Submit a construction proposal: The proposal is proof that you plan to develop your property as required when you get a new construction loan. Your new home should meet the criteria we outlined earlier. 
    4. Get your home appraised: A home appraisal by the VA is a crucial step to securing a mortgage. This is to ensure that your new home is worth more than what it cost to build.
    5. Get VA property certification: A VA-licensed inspector needs to check if your home adheres to local building codes and other minimum VA requirements.
    6. Provide post-construction documents to the VA: When the construction is complete, you should get either a builder warranty or an insurance protection plan in case there are defects.
    7. Pay off your loans: Your loan will come into effect once the construction is over. With a one-time close loan, this will happen automatically. If you have a two-time close, you have to replace your original construction loan with the VA-backed mortgage.

    Finding Lenders Who Will Fund A VA-Approved Land Loan

    The biggest problem with VA-backed home construction loans is that there aren’t many lenders who are willing to fund them. Construction loans are notorious for being high-risk since many things can happen during the construction process that could impact your ability to pay off your debt. 

    For example, if the costs of new construction go over your estimate, you may end up halting the entire project. Or if the market crashes mid-construction, that could delay or even indefinitely postpone the work. 

    So while the VA will allow you to purchase land with the promise of building a home, that doesn’t guarantee that you’ll be able to push through with the acquisition. First, you need to find a lender that offers construction home loans. 

    If you research thoroughly and ask the right questions, you’ll avoid wasting time on lenders that won’t finance you. You can also ask your real estate agent for any recommendations.

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    Other Types Of VA Loans & Home Loans

    If you still can’t find a lender for a VA loan construction, you might have to consider other options for purchasing land. For veterans, there are other options within the VA loan program, such as:

    • Native American Direct Loan (NADL): If you are a Native American veteran or a veteran married to a Native American, you may qualify for a NADL. You must purchase, build, or improve property on federal trust land to take advantage of this option.
    • Cash-out refinance loan: While you can use the cash-out refinance loan to pay off debt or fund a renovation, you can also use it to refinance a non-VA loan into a VA loan. You can take out a conventional home loan or third-party construction loan for the land you want to purchase, and then later refinance it under the VA loan program.

    Outside of the VA, you should consider getting a conventional home or land loan. There are also FHA construction loans, USDA-guaranteed loans, home equity loans, and many more.

    Refinancing A VA Loan

    Refinancing is when you replace an old loan with a new mortgage. This helps you get better rates and loan terms, reduce your monthly payments, and ease your financial stress.

    One option for refinancing is the cash-out refinance loan we touched on earlier. This type of loan can help you refinance a non-VA or conventional loan into a VA-approved loan. Keep in mind that while refinancing may give you reduced rates, there are also closing costs, fees, and appraisal charges to consider as well.

    Veterans who already have a VA-backed loan can also sign up for the Interest Rate Reduction Refinance Loan (IRRRL). The IRRRL can either lower your monthly payments with a lower interest rate or help you stabilize your mortgage by moving to a fixed-rate loan. According to the VA, there’s no need for an appraisal or a credit check if you go this route, although some lenders may require them.

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    The Department of Veterans Affairs loan program has helped millions of veterans achieve their homeowner dreams. With lower interest rates, forgiving credit score requirements, and no need for thousands of dollars upfront, VA loans are a great way for veterans to get housing assistance.

    You can use a VA-backed loan to purchase land as long as you also have plans of building a home and residing on the property. You also have to meet specific construction requirements and work with a VA-licensed contractor.

    The most significant challenge in the whole process is finding the right lender. It’s nearly impossible to get a VA-backed construction loan without any down payment. 

    Let the Wesley Mortgage, LLC assist you in securing your mortgage. Reach out to us and learn more about the services we offer!

    Written By Ed Wallace
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