VA Land Loan Rules

Veterans and active service members often ask about using the VA loan to purchase land. While the VA does not allow loans to purchase only land, options exist to purchase land and build a home on it. As such, we’ll use this article to outline VA land loan rules.

Specifically, we’ll discuss the following:

• VA Loan Overview
• VA Land Loan Option 1: Simultaneous Purchase and Construction
• VA Land Loan Option 2: Alternative Land Financing
• VA Land Loan Option 3: Alternative Land and Construction Financing
• VA Land Loan Eligibility Requirements
• Final Thoughts

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VA Loan Overview

The VA loan offers veterans and active service members an incredible home buying opportunity. Administered by the Department of Veterans Affairs (VA) and issued by VA-approved lenders, the loan program provides the following terms:

• No down payment required
• No private mortgage insurance (PMI) required
• Low interest rates
• Streamlined refinancing option via the Interest Rate Reduction Refinance Loan (IRRRL)

However, the VA loan program exists to promote homeownership, not real estate investing. As a result, the VA mandates an occupancy period. After someone purchases a home with the VA loan, they generally need to live there for at least a year (rare exceptions exist to this rule).

For this reason, the VA does not allow loans to purchase land without A) property on it, or B) a plan to immediately build property. Purchasing land alone represents investing – not occupancy.

Despite this rule, options to purchase land with a VA loan do exist. But, buyers must meet certain requirements. In the following three sections, we’ll outline three options for using the VA loan to purchase land. The first option involves direct VA financing, while the second and third use indirect VA financing.

VA Land Loan Option 1: Simultaneous Purchase and Construction

According to VA guidelines, eligible borrowers can use the VA loan to purchase land and property together – not land alone. However, a minor caveat to this rule exists that lets VA borrowers buy land directly with their VA loans. Borrowers can use the VA loan to purchase land so long as they have plans to immediately build a property there. In other words, a buyer couldn’t buy a plot of land, hope for it to appreciate in value, and resell it in the future. He or she needs to purchase it with an immediate plan to build.

If eligible borrowers work with a VA-approved builder, they can apply for a combined purchase/construction loan. They’ll need to submit the formal construction plans and, upon completion, have the finished property inspected. Furthermore, the building plans must meet certain criteria. Here are the major requirements:

• As with buying a property, you cannot build a home with more than four units. And, each unit must have its own utility connections, with the borrower/owner occupying one of them as a primary residence.
• The property needs to be built on and affixed to a permanent foundation.
• The property needs to conform to the VA’s MPRs, or Minimum Property Requirements. Related, the property needs to meet federal and local building requirements.
• The land cannot be located in a flood or noise zone, near a landfill, or vulnerable to major natural disasters (e.g. landslides or earthquakes).

And, buyers will of course need to actually qualify for the VA loan, as demonstrated by their VA-issued certificate of eligibility. Additionally, the builder you partner with must have a valid VA identification.

VA Land Loan Option 2: Alternative Land Financing

The second VA land loan option represents an indirect financing method. With this approach, borrowers purchase land with an alternative means of financing (e.g. short-term loan, conventional loan, etc.). Then, borrowers use a VA construction loan (as opposed to a purchase and construction loan) to build a primary residence on that land.

With a final property built, veterans and service members can then refinance their VA construction loans into a permanent VA loan. And, this permanent loan would pay off the outstanding balance on the original land purchase and construction loans, as the VA would conduct its final appraisal based on the finished property and land together. Of note, this option also requires using a builder that the VA has approved.

This provides a great opportunity for eligible borrowers to indirectly purchase land with a VA loan. But, it requires a level of financial creativity to find a short-term financing option for purchasing land.

VA Land Loan Option 3: Alternative Land and Construction Financing

This final option also entails an indirect means of purchasing land with a VA loan.

VA construction loans can require a fair amount of administrative red tape. As a result, some borrowers choose to avoid them all together. Instead, qualified buyers can apply for a non-VA purchase/construction loan. This can be used to A) purchase a plot of land, and B) build a home on it. Assuming the finished property meets VA MPRs and acts as the borrower’s primary residence, the original loan can then be refinanced into a permanent VA loan.

This option can provide a streamlined way to purchase land with a VA loan. Specifically, borrowers don’t need to deal with any VA-related construction or land loans. Instead, they use short-term, conventional construction financing to purchase land and build a home, refinancing into a VA loan product upon completion. However, this strategy inherently relies on a knowledge of how short-term construction financing works, meaning most borrowers pursuing this option will need to do some additional research.

VA Land Loan Eligibility Requirements

With all three of the above land loan options, borrowers still need to qualify for a VA loan. And, for veterans and service members to qualify, they need to meet all of the following requirements:

• Qualify for a VA home loan, as demonstrated by your Certificate of Eligibility (COE)
• Meet the VA’s and lender’s standards for income, credit score, debt-to-income ratio, and any other financial requirements
• Will live in the home – as a primary residence – you’re refinancing from A) a VA construction loan, or B) a conventional construction loan

Final Thoughts

Buying land with a VA loan is neither common nor easy. But, it can be done. If eligible veterans and service members prefer building over buying a completed property, several options exist to use a VA land loan – either directly or indirectly.

Maurice “Chipp” Naylon spent nine years as an infantry officer in the Marine Corps. He is currently a licensed CPA specializing in real estate development and accounting.

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