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The VA Lender's Handbook has several things to say regarding the use of the VA loan benefit for land purchases. The borrower is required to apply for a construction loan and the land purchase loan at the same time.

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VA Loan Rules For Land Purchases

March 4, 2013 - One type of commonly asked question about VA home loans involves the purchase of land that the home is situated on. You may have a question in this area that goes something like this:

I want to buy land 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?

The VA Lender's Handbook has several things to say regarding the use of the VA loan benefit for land purchases. According to Chapter Three of the handbook, "VA cannot guarantee loans made for ineligible loan purposes." The chapter then goes on to list out a number of those ineligible loan purposes which include the following:

"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)."

According to VA loan rules, the borrower is required to apply for a construction loan and the land purchase loan at the same time. What does the VA loan rule book say about these loans? What will the VA allow?

VA Pamphlet 26-7 tells us, "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."

There's more. VA loan rules also add a requirement that "...the lender must obtain written approval from the borrower before each draw payment is provided to the builder."

Typical suburban homes aren't the only types of homes that can be built in this manner. You'll also find, under a list of "eligible loan purposes" in the rule book, that VA loans are permitted to be used in order 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)"

To answer the original basic question, the borrower cannot purchase land without a construction commitment. For more information on this process, speak to a loan officer or contact the Department of Veterans Affairs directly.

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