VA Loans For Land Purchases: A Reader Question
A reader asks, “I have read different things stating the use of a VA loan. I want to buy a lot that is already developed in a subdivision and then build a house on it to use as our primary residence in a year or two. Can I use the VA loan for this or not? Some websites say yes and others say no.”
Let’s see what the VA Lender’s Handbook says about VA loans for land purchases. According to Chapter Three, Section Two:
“VA cannot guarantee loans made for ineligible loan purposes. Examples of ineligible loan purposes include:
- Purchase of unimproved land with the intent to improve it at some future date (that is, the land purchase is not in conjunction with a construction loan).”
That portion seems fairly straightforward. You must apply for a construction loan and the land purchase loan at the same time. What does the VA loan rulebook say about these loans? We’ve read what VA will NOT do, what WILL they do with regards to a VA construction loan that includes the purchase or land and/or a construction contract?
VA Pamphlet 26-7 says, “VA will guarantee a ‘construction/permanent home loan,’ that is, a loan to finance the construction/purchase of a residence. The loan is closed prior to the start of construction with proceeds disbursed to cover the cost of, or balance owed on, the land, and the balance into escrow. The escrowed monies are paid out to the builder during construction.”
The rules also state, “The lender must obtain written approval from the borrower before each draw payment is provided to the builder.” You’ll also find, under a list of “eligible loan purposes” in the rulebook, that VA loans may be used “To purchase or construct a residence, including a condominium unit to be owned and occupied by the veteran as a home:
- The loan may include simultaneous purchase of the land on which the residence is situated or will be situated,
- Loans may also be guaranteed for the construction of a residence on land already owned by the veteran (a portion of the loan may be used to refinance a purchase money mortgage or sales contract for the purchase of the land, subject to reasonable value requirements)”
For more information on this process, speak to a loan officer or contact the Department of Veterans Affairs directly.
Do you have questions about VA home loans or refinancing loans? Ask us in the comments section.