Many Veterans, active-duty service members and eligible surviving spouses realize the dream of owning or building their family’s first home with a VA One-Time Close (OTC) Construction loan. The unique thing about this strong financial tool is that it covers all steps of the building operation part, such as purchasing land, construction financing and in the end permanent mortgage with a single loan on only one closing.
This guide will take a deeper look at the VA One Time Close Construction Loan including qualifications, how the process works and financial implications, plus important information regarding builders and property requirements.
1. Defining the VA One-Time Close Loan
A VA One Time Close Construction Loan offers a simple single loan transaction for land, interim construction and permanent financing. It’s guaranteed by the U.S. Department of Veterans Affairs (VA) but is issued through VA-approved private lenders.
The Core Difference: One Close vs. Two Closes
| Feature | VA One Time Close Construction Loan | Traditional Two-Close Construction Loan |
| Number of Closings | One Closing before construction begins. | Two Closings (one for construction, one for the permanent loan). |
| Loan Conversion | Automatic conversion from construction to permanent phase. No Re-qualification. | Requires a second loan application and underwriting to pay off the construction loan. |
| Closing Costs | One set of closing costs and associated fees. | Two sets of closing costs, appraisals, and title fees. |
| Interest Rate | Permanent fixed rate is locked at the first closing, mitigating rate risk during the entire build. | Permanent rate is locked justbefore the second closing, exposing the borrower to market risk during construction. |
Who is Eligible?
Anyone who can qualify for a regular purchase loan is eligible for the VA One Time Close Construction Loan:
- Veterans
- Active-Duty Service Members
- National Guard and Reserve Members (who meet minimum active service requirements)
- Surviving Spouses (under specific VA criteria)
Eligibility is established with a Certificate of Eligibility (COE), which proves you are eligible and qualified to receive the VA home loan benefit.
2. Key Benefits: Why VA OTC Wins
The VA One Time Close Construction Loan may be the best construction financing option available for those who qualify because of its incredible advantages.
1. Zero Down Payment (100% Financing)
This is by far the greatest benefit. Qualified borrowers can finance up to 100% of the cost of your construction, and should also provide you with the flexibility of a $0 down payment for your project7 assuming its value supports it. This cuts down on the cash outlay now required closing a Traditional or FHA Construction Loan when you make a purchase.
2. Interest Rate Security
The permanent long-term interest rate (30 year) is established during the initial closing. And considering home building can take anywhere from 6-12 months, it is all the more valuable to you as a way to protect yourself from any interest rate increases that can occur during your build.
3. No Private Mortgage Insurance (PMI)
Monthly mortgage insurance is not required on VA loans and saves you a significant amount as compared with Conventional loans (PMI) or FHA loans (MIP).
4. Simplified Process
By eliminating the need to re-qualify or undergo a second closing, the VA One Time Close Construction Loan removes the primary sources of stress and expense found in traditional two-time close financing. You only provide your financial documentation once.
3. Financial Mechanics: How Much Can I Borrow?
How much you can borrow is based on three main factors: your entitlement, the market value of the completed home and your qualifying credit.
How Much Can I Borrow on a VA One-Time Close Construction Loan?
There are usually no limits on Congress mandated VA loan amounts for those with full entitlement. Instead, the loan limits how much you can borrow:
- Your Lender’s Guidelines: Most lenders have “in-house” caps, usually not exceeding $1.5 million or more, reviewed on a case by case basis.
- Your Financial Qualification: It is vital you’re able to comfortably make the payment on a debt that’s reduced and your Debt-To-Income (DTI) ratio and Residual Income should be adequate.
- The Property’s Value: The loan-to-value (LTV) ratio cannot be more than the lesser of the following two ratios:
- The Cost of the land acquisition and developing the home (Overall Acquisition Cost).
- The Appraised Value of the property upon completion.
Credit Requirements for a VA One Time Close Construction Loan
The VA doesn’t enforce a minimum credit score in practice. But because VA loan OTCs are riskier for the lender, lenders add their own minimum standards or “overlays.”
- Typical Minimum FICO: The average minimum required credit score for a VA One Time Close Construction Loan is about 620-640 depending on your lender.
- The Focus on Residual Income: Only the VA loan offers a Residual Income approach to income qualification, which can be more important than a DTI ratio. This figure makes sure that you will not be tight on money each month paying for large debts and a new estimated house payment.
4. Property and Builder Requirements
The unique nature of the VA One Time Close Construction Loan places strict requirements on both the property and the general contractor.
What Types of Home Can I Build with a VA One Time Close Construction Loan?
The loan is specifically for building a primary residence that meets the VA’s Minimum Property Requirements (MPRs) for safety, soundness, and sanitation.
| Eligible Home Types | Ineligible/Restricted Home Types |
| Site-Built Homes (traditional “stick-built”) | Investment or Vacation Properties |
| Modular Homes (must be set on a permanent foundation) | “Kit” Homes, Barndominiums, or Shipping Container Homes |
| Multi-Wide Manufactured Homes (new only) | Commercial-Use Properties |
Must I have a VA Approved Builder for a VA One Time Close Construction Loan?
Yes, absolutely. You can only work with a VA-Registered Builder (who is also approved with your particular VA OTC lender).
- No Self-Build: You can’t be your own general contractor or do any of the work yourself.
- Builder Approval: If your builder is not currently on the VA’s approved list, your lender can help guide them through the very simple process of attaining a VA Builder ID. The lender will do some vetting of their own, and the builder should be prepared to show licensing, insurance, financial stability.
Do I have to own the Land or can that be part of the VA One Time Close Construction Loan?
You don’t have to own the land. The VA One Time Close Construction Loan program is meant to fund:
- The purchase of the land/lot.
- The construction of the home.
- The permanent mortgage.
That total is rolled into the single loan amount that closes before construction begins.
If I own my land already, does it help me with a VA One Time Close Construction Loan?
Yes, it helps significantly.
- Equity from Land: If you own your own land, the value can be used as a cash down payment when you obtain FHA loan financing.
- Simplified Process: If you already have a loan on the land, the VA One Time Close Construction Loan will pay that off at closing and incorporate your land remains value and construction costs into the new one mortgage. Opportunity to close more quickly you can streamline the closing timeline if you own the land in advance.
How Much Land Can I Buy with a VA One Time Close Construction Loan?
The VA does not limit the amount of acreage. The general rule is that the lot cannot be “extraordinary” and must conform to the size of other lots in the area. If the extra land is not needed (directly) for the utility of the home, it could be excluded from the appraised value.
5. The VA One Time Close Construction Loan Process: 7 Steps
The procedure is both thorough and simple, though provided by a single closing.
What’s the Process on a VA One-Time Close Construction Loan?
Step 1: Get Your COE and Pre-Qualified
Get your Certificate of Eligibility (COE). Then, get pre-qualified with a lender who offers VA One Time Close Construction Loan products. This will set your upper loan level and your budget.
Step 2: Land Acquisition, Builder Selection, and Contract
Close the deal on your land (if you purchased one). Choose a VA Approved builder and execute a complete construction agreement (including the final plans and complete cost breakdown).
Step 3: The “Subject-To” VA Appraisal
The lender obtains a special VA appraisal of the completed dwelling (not the vacant acreage). This form of appraisal figures the Market Value of a home that is not yet built. This is the maximum loan.
Step 4: The Single Closing
Closing on the loan and signing all permanent mortgage documents. Your rate of interest is fixed. All construction funds are deposited into a restricted escrow account (referred to as a Loan in Process or LIP account).
Step 5: Construction and Draw Schedule
Construction begins. The builder is paid at various points in time, called draws, on a schedule (e.g. foundation stage complete, framing stage complete, roof on etc.) agreed upon prior to the commencement of construction. Before each release of draw money, a lender’s representative must conduct an on-site inspection to ensure completion of the work and preserve the veteran’s investment.
Step 6: Final Inspection
After the house is finished, a VA-assigned appraiser or a final inspector conducts another review to make sure the home complies with all VA standards and was constructed exactly according to its approved plans. A certificate of occupancy (CO) is issued.
Step 7: Loan Conversion
The construction loan automatically transitions to a permanent, fixed rate VA home loan. You start to make your first principal and interest mortgage payment, which usually occurs 30 to 60 days after the conversion.
6. Construction Period: Interest and Contingency
Do I Pay A Mortgage During Construction?
No, you don’t have any full Principal and Interest (P&I) during the construction period. But there is a downside to that construction financing:
- Interest-Only Draw Payments: For the length of the construction period, interest only accrues on the dollars you have drawn (withdrawn) to pay your builder, versus the total loan amount.
- Builder Responsibility or Interest Reserve: This accrued interest is typically covered by an Interest Reserve that the builder sets up and funds at close, which means it’s included in your loan amount. In some instances, the builder will have to pay this interest directly. The aim is to make sure the veteran pays no out-of-pocket interest during the build.
The Role of the Contingency Reserve
The contract for construction normally provides for the Reserves (e.g., 5% to 10% of Contract amount). This reserve is a bit of an extra cushion in the loan amount to protect against any unexpected costs, increases in material prices or small changes if they come up.
- Protection: It provides security for all parties from budget shortfalls.
- Veteran Benefit: If construction is completed below budget and the contingency funds are not utilized, such excess amount directly reduces your final permanent mortgage balance as sic your benefit money saved over life of loan.
The VA One Time Close Construction Loan helps veterans finance the Homes and help areas, given with homes at a cheaper price, subtracting the cost of materials in building it. So instead of worrying about those details everything from rates to points, there’s a lot to consider in that stack papers you can focus on the fun part: Watching your dream home go up.
