Can You Use a VA Loan to Buy Land?

You can use a VA loan to buy land, but only if you plan to build a home on it immediately. But should you use this form of mortgage financing, or are there better alternatives? It depends on your unique financial situation and your eligibility for VA-backed loans.

Understanding VA Loans

Before deciding if a VA loan is best to buy land, it’s worth understanding how it works.

What is a VA Loan?

A VA loan is a mortgage product backed by the Department of Veterans Affairs that’s accessible to active-duty service members, veterans and qualifying spouses. It comes with various perks designed to make homeownership more accessible and affordable.

Borrowers generally use VA loans to purchase existing homes. However, there are options to refinance your current mortgage or construct a new home.

Eligibility for VA Loans

Here’s what you need to qualify for a VA loan:

• VA-approved lender: To secure a VA-backed loan, you must work with a VA-approved lender. These lenders are experts in VA lending guidelines and can assist you throughout the process.
• Income stability and employment history: Lenders evaluate your job history to confirm you have a reliable and sufficient income. Generally, they prefer at least two years of consistent work experience in your current role or industry.
• Debt-to-income ratio: The debt-to-income (DTI) ratio shows the portion of your monthly gross income spent on debt payments. Ideally, your DTI should be under 41%, but some lenders might accept higher ratios if there are other compensating factors.
• Credit history and score: Most lenders look for a credit score of at least 640. However, some may approve applicants with scores as low as 620 or even lower since the VA does not have a minimum credit score requirement.
• Certificate of Eligibility (COE): The COE verifies your entitlement to VA loan benefits. You can obtain it through the eBenefits portal, by mail or with the assistance of your lender.

Benefits of VA Loans

VA loans offer benefits that make them an attractive option for qualifying service members, including:

• Flexible lending guidelines
• No down payment requirements
• Competitive interest rates
• No private mortgage insurance (PMI)
• Limits on closing costs
• Allowable seller concession contributions of up to 4% of the loan amount

Purchasing Land with a VA Loan

If you plan to build, you can purchase land with a VA loan. However, strict conditions must be met, which will be discussed shortly.

Can You Use a VA Loan to Buy Land?

VA loans cannot be used solely to purchase land. That said, the transaction may be allowed if the home you plan to construct will reside on that land and be used as your primary residence.

What Types of Properties Can Be Financed Using a VA Loan?

You can use a VA loan to buy a single-family home, manufactured home, condo or farm residence. If you plan to build a house from the ground up, VA construction loans with the same great benefits are also available.

VA Loan Restrictions on Land Purchases

Again, using a VA loan solely for a land purchase is prohibited. But if you take out a construction loan to build a home, you can roll the land cost into the total loan amount.

Are There Specific Requirements for Using a VA Loan to Buy Land?

Below is an overview of the lending guidelines when using a VA loan to buy land:

• Eligibility criteria: You must meet the general guidelines for the VA loan program, including the service requirements, and have plans to begin construction on the land immediately.
• Primary residence: Again, the land that will house the property you build must be used as your primary residence, as VA loans cannot be used to buy or construct vacation or investment properties.
• Construction plan: The lender will request a detailed plan for the home you want to build on the land. It should include costs and a timeline for the project.
• Farm residences: If there’s a farm on the land, a home you intend to occupy as your primary residence must also be present. The VA prohibits the purchase of land to be used solely for agricultural purposes.
• Refinancing options: If you purchased land using a non-VA loan, you may be able to refinance it into the VA construction loan when you’re ready to start building.

Pros and Cons of Using VA Loans for Land and Construction

Benefits

• You can secure a loan with 100% financing, which means a down payment isn’t required.
• You could still qualify with less-than-perfect credit, as VA construction loans have more flexible credit guidelines than traditional construction loans.
• The lower interest rates associated with VA loans equate to more affordable monthly mortgage payments and lower borrowing costs over the loan term.
• VA construction loans come with a single-close, but traditional construction loans require two separate closings.
• You won’t pay PMI on VA construction loans, potentially saving you several hundreds of dollars each month in housing costs.

Potential Drawbacks

• You’re limited to VA-approved lenders and builders to fund and construct your new home.
• The lending process for VA construction loans is lengthy and tedious, and there is a lot of paperwork involved.
• Delays can happen that prolong timelines and increase construction costs.

Steps to Take a VA Loan to Buy Land

If you’re ready to move forward, here’s what to do next.

Consult with a VA-Approved Lender

Reach out to a VA-approved lender to discuss your plans. They can provide more detailed guidance on the next steps and share a list of the documents you’ll need when applying for a loan. You can also request a pre-qualification to get an idea of how much you can borrow.

Understand the Specific Requirements

During your consultation, the lender will review specific requirements for VA construction loans. To avoid surprises, be sure to ask any questions before formally applying for a loan.

Exploring Combined Loan Options

Combined loan options can be useful for those wanting to build a home on the land. A common method is to secure a short-term construction loan to cover the building phase. Then, you can refinance it into a VA loan once the home is complete. You might also buy the land with a traditional loan and then use a VA loan to fund the construction.

Some options allow you to finance both land and construction under a single loan package. However, these packages might come with stricter lending guidelines.

Alternative Options to Consider

To recap, here are some suggestions for financing the purchase of your land using a VA loan.

Land-Home Packages

You can bundle the purchase of the land and construction costs with a VA construction loan. To adopt this strategy, you must submit plans to the lender that show you plan to begin the building process immediately following loan approval.

Refinancing After Construction

If you finance the land with a different type of loan, you can possibly roll it into the VA loan once construction is complete. This can be done through a refinance.

Conclusion: Final Thoughts and Recommendations on Using a VA Loan to Buy Land

You cannot use a VA loan to purchase land alone. VA loans are designed to help service members buy and construct homes. If you plan to build a home on your land, you can use a VA construction loan for this purpose. Remember, the property must be used as your primary residence to qualify for funding.

Frequently Asked Questions (FAQs) About Using a VA Loan to Buy Land