Many veterans are surprised to learn that building a custom home with a VA loan involves different closing costs than buying an existing home. Without understanding which fees are required, which can be financed, and which can be negotiated, it’s easy to underestimate the cash needed before construction begins.
This comprehensive guide covers all allowable, non-allowable, and construction-specific closing fees in your loan estimate. Dive in to see exactly where your VA construction loan closing costs come from and get keys without stress.
Quick Answer: How Much Are VA Construction Loan Closing Costs?
Generally, you can expect the total closing costs of a VA construction loan to fall between 3% and 6% of the loan amount. Several factors affect those closing costs: where the property is, the lender’s charges, what your builder requires, upfront expenses, and whether you’re taking out a one-time or two-time closing loan.
Total closing costs are often estimated as a percentage of the loan amount. Still, the actual amount varies by lender, location, loan structure, prepaid items, and transaction-specific fees. Confirm current estimates with your lender before relying on percentage-based examples.
Key Takeaways
- Construction loan costs typically range from three percent to six percent of the entire loan amount.
- Additional construction costs will apply, including those for builder approval, draw inspections, and construction administration.
- Some expenses, like the VA Funding Fee, can be rolled into the loan; however, most third-party costs will be paid at closing.
- You may be able to save cash up front by using some or all of these credits: builder credits, seller concessions, and lender credits.
- Double-checking your Loan Estimate and Closing Disclosure will keep you from paying unwanted and prohibited charges.
- A knowledgeable VA lender can save you time and money, as well as unpleasant surprises on closing day.
What Are VA Construction Loan Closing Costs?
Closing costs on a VA construction loan are all of the third-party, legal, and administrative fees you need to pay to get the loan closed.
If you’re using a VA construction loan to build your house, you’ll also pay the costs of financing the land you purchased and the physical building, as well as securing a permanent mortgage. You’ll have specific lines on your paperwork to be aware of, as you are not buying a home that’s already built.
Why Construction Loan Closing Costs Are Different from Traditional VA Loans
Unlike a traditional VA purchase loan, a VA construction loan finances both the construction process and the completed home. That means lenders take on additional administrative work throughout the build, resulting in several construction-specific fees that don’t exist with a standard mortgage.
- Builder approval: The builder must satisfy applicable state and local licensing requirements and carry general liability and workers’ compensation insurance sufficient to meet current construction overlay requirements. Confirm specific coverage minimums with your lender.
- Draw inspections: Inspectors are contracted by the lenders and sent to the property on a scheduled basis as different phases of the work are completed. These inspections ensure the work has been completed and that the funds can be disbursed to the builder.
- Construction administration: This is what the lender charges to cover the costs of operating the complicated escrow draw account.
- Permits: Local governments charge fees for building permits to assess and approve your building plans and structural drawings.
- Contingency reserve: Lenders typically require a minimum contingency fund of around 2% of the cost to construct, held in reserve against unexpected material or labor cost overruns. Some or all of this requirement may be waived depending on the contract structure. Confirm the current requirement with your lender.
- Interest reserve (soft costs): During construction, the builder — not the borrower — is generally required to cover interest-only payments and the construction management fee as part of the builder contract, so the borrower is not expected to make these payments out of pocket while the home is being built.
- One-time close vs. two-time close: You save money with a VA Construction-to-Permanent Loan (one-time close) since you only close one time, paying for one set of closing costs. You will close twice when you get a two-time close; a two-close structure may require a second set of certain closing and administrative charges. You might see this combined cost as VA one-time close loan closing costs or VA one-time close construction loan closing costs.
What Determines Your VA Construction Loan Closing Costs?
It seems everyone who is planning on borrowing to build hears that closing costs will fall in the range of 3-6% of the loan amount. Of course, it really does depend on a few items: no two building transactions will be the same, and lenders will calculate the cost accordingly.
However, some of the bigger issues:
- Loan Amount: Not surprisingly, larger loans result in larger closing costs, since various costs are assessed as a percentage of the loan amount.
- Property Location: Title company closing costs, recording fees, legal requirements for an attorney, permits, and state/county taxes can all fluctuate.
- Builder Requirements: A builder’s loan must be approved before construction starts, and the more complicated a construction job, the more admin and additional work the lender will have to do.
Type of VA Construction Loan
With a single-closing VA construction loan, you’ll pay closing costs only once, as opposed to a double-closing loan, and you’ll pay less because of it.
VA Funding Fee Status
If a disabled veteran or their surviving spouse is approved, they can be exempt from the VA Funding Fee, which could save them quite a bit of cash on closing day!
VA Construction Loan Closing Cost Breakdown
As long as your lender shows you a Loan Estimate clearly itemizing all the fees associated with your transaction, you’ll be able to easily tell if any of these line items are a little inflated:
- Lender Fees – Origination – Underwriting – Processing
- Government Fees – Funding Fee – Recording
- Property Fees – Title – Survey – Flood Certification
- Construction Fees – Draw inspections – Builder Risk – Construction Administration
How to Read Your VA Loan Estimate
Each loan provider is required to furnish a Loan Estimate three (3) days after the completion of your loan application. This will inform you of the costs your loan should incur, and allow you to shop loan providers. While scrutinizing your Loan Estimate, make sure you closely examine the following:
- Loan Origination Charges
- Appraisal Fees
- Title Services
- Government Recording Fees
- Prepaid Property Taxes
- Homeowners Insurance
- Escrow Deposits
- Estimated Cash to Close
Take a close look at each fee, and if you’re seeing duplicated lender fees or any that you don’t know the reason for, ask your lender what they’re for before continuing.
Which Closing Costs Can Be Rolled Into a VA Construction Loan?
Typically, your lender will expect you to pay all regular purchase closing costs in cash on your closing day. Still, with a VA construction loan, you have the option to roll some of your closing costs into your loan.
- Usually financeable: So you can roll in the VA Funding Fee, your interest reserve, and the builder contingency reserve into your total loan amount.
- Sometimes financeable: In this case, you own the land, and your lender will use your equity to cover closing costs.
- Usually cannot be financed: You’ll be required to pay usual borrower closing costs (origination, title, prepaid taxes, homeowners’ insurance) at closing.
At-a-Glance: Which Closing Costs Can Be Financed?
While every lender may have slightly different requirements, the table below shows which closing costs are commonly financed and which are usually paid out of pocket at closing.
| Closing Cost | Usually Paid at Closing | Can Be Financed? |
|---|---|---|
| VA Funding Fee | No | Yes |
| Builder Contingency Reserve | Sometimes | Often |
| Loan Origination Fee | Yes | Usually No |
| Title Search & Title Insurance | Yes | No |
| Appraisal Fee | Yes | No |
| Recording Fees | Yes | No |
| Escrow for Taxes & Insurance | Yes | No |
| Builder’s Risk Insurance | Yes | No |
| Draw Inspection Fees | Yes | Usually No |
Note: Financing eligibility varies by lender, loan structure, available equity, and VA guidelines. Review your Loan Estimate with your lender to determine which costs can be included in your loan amount.
Example Calculation: How Much Are VA Construction Loan Closing Costs
Here are realistic closing cost estimates for building your new $400k custom home with 0% down payment on a VA construction loan:
- Base Build & Land Cost: $400,000
- Lender Origination Fee (1%): $4,000
- VA Funding Fee (2.15% – financed): $8,600
- VA Proposed Appraisal Fee: $850
- Title Search & Lender’s Title Insurance: $1,800
- Recording, Survey, & local fees: $1,200
- Prepaid Taxes & Homeowners Insurance (Escrow): $3,500
- Builder’s Risk Insurance: $900
- Draw Inspection Fees (5 draws): $750
- Total closing costs on a VA construction loan: $21,600
- Total Cash Required at Closing (with Funding Fee financed): $13,000
Expert Tip: Don’t focus only on total closing costs. Ask your lender for your Cash to Close, which reflects the actual amount you’ll need on closing day after financing eligible fees and applying any seller or builder credits.
Cash to Close vs Closing Costs: What are the Differences?
Knowing the difference between the two helps you configure a more cost-effective closing. But even more critical in limiting your cash costs at closing is negotiating which party pays for what.
Unfortunately, these two cost terms can get muddled in most buyers’ minds, resulting in a less-than-pleasant day at the closing table.
- Each line item that your lender and other parties collect from you to prepare your loan is a closing cost.
- Cash to close is the specific, exact dollar amount you will hand over at closing. It takes into account your out-of-pocket closing costs that will not be financed, anything in escrow or prepaid, your equity in the land, and any concessions or builder credits offered by the seller.
Expert Tip: Now request closing costs and cash to close from your lender. They are two different numbers, and you want to know the difference so there aren’t surprises on the day you’re finally closing!
Who Pays VA Construction Loan Closing Costs?
Veterans are generally responsible for their VA construction loan closing costs. However, some expenses may be offset through negotiated builder credits, seller-paid costs where permitted, lender credits, or financed charges when allowed under the loan program. The final allocation depends on the purchase contract, lender requirements, and current VA guidelines.
Builder Credits
Builder credits may be negotiated as part of your construction contract. They can help reduce certain out-of-pocket closing expenses. The availability and amount of any credit depend on the builder’s pricing, contract terms, interested-party contribution limits, and your lender’s requirements. Request a written breakdown of any builder-paid costs before signing the construction agreement.
Seller Contributions
If you’re purchasing the building lot from a separate seller, that seller may agree to pay some allowable closing costs as part of the purchase agreement. Under current VA rules, seller concessions are subject to specific limits. At the same time, normal closing costs and eligible discount points are treated separately. Review the purchase contract and Loan Estimate to understand exactly which expenses the seller has agreed to cover.
Lender Credits
Some lenders offer credits that reduce your upfront closing costs in exchange for accepting a higher interest rate. While this may lower your immediate cash requirement, it can increase the total cost of borrowing over the life of the loan. Compare both the interest rate and the total closing costs before choosing this option.
Veteran Responsibility
Even when credits or concessions are available, veterans are typically responsible for any remaining allowable closing costs not paid by another party or financed into the loan where permitted. Before closing, review both your Loan Estimate and Closing Disclosure carefully so you understand your final Cash to Close and can identify any unexpected or duplicate charges.
Can the Builder Pay Your Closing Costs for VA Construction Loans?
Your builder can give you closing cost credits and/or concessions to sign a building contract with them.
Can the Seller Pay Closing Costs?
VA rules distinguish between seller-paid closing costs and seller concessions. The 4% limit applies only to seller concessions, and that limit is calculated using the property’s reasonable value. Normal closing costs, including appraisal fees, loan origination charges, title services, and attorney fees, may be paid separately by the seller and do not count toward the 4% concession limit.
Discount points of up to 2% of the loan amount are also outside the 4% concession cap. Review your purchase contract and Loan Estimate to understand which costs the seller has agreed to pay.
Can You Reduce VA Construction Loan Closing Costs?
You don’t need to take the first cost quote you’re given from your lender. Take action to decrease your out-of-pocket expenses:
- Shop lenders: There is no shortage of VA construction loan specialists available to shop for the lowest origination fee. Shop them!
- Compare title companies: Do your research and shop around for your own title insurance company and closing agent to save money on administrative costs.
- Negotiate builder credits: During contract negotiations, ask the developer to contribute to some of your closing costs.
- Use lender credits: You can always ask your lender to cover some of your closing costs. All you need to do in exchange is to agree to pay a slightly higher interest rate on the loan.
- Review Loan Estimate: You should comb through each line of your Loan Estimate and ensure there’s no double-charging of non-allowable charges.
- Review Closing Disclosure: Do yourself a favor, examine both documents closely, look for any additional charges, and compare it to your final loan documentation.
- Ask about fee waivers: And be sure to check with your loan servicer; they might offer military discounts or waive certain fees for veterans.
Expert Tip: The interest rate is not the only thing you need to compare. Never forget to compare closing costs outlined in your Loan Estimate. Even if a lender has a slightly higher interest rate, the lender may have significantly lower closing costs, which can save you a good deal of money upfront.
Common Closing Cost Mistakes Veterans Make
Don’t let this happen to you. Instead, keep an eye on those closing costs – closing costs can run into the thousands of dollars. Just by being aware of them, you’ll already save money compared to the average borrower who only thinks about the purchase price.
- Waiting Until Closing to Review Fees — Look over your Loan Estimate the second it comes your way. Don’t wait until Closing Disclosure day because at that point you won’t have enough time to challenge any incorrect charges.
- Assuming Every Fee Can Be Financed — You can finance the VA Funding Fee, but that’s about it when it comes to 3rd party fees. Ask the lender how much cash is due at closing, always!
- Not Negotiating Credits — It all comes down to buying down your interest rate. That’s where things like builder credits, seller credits, and lender credits come into play. They will make a huge difference in the amount you pay upfront. And most people don’t even ask!
- Choosing a Lender Based Only on Interest Rate — Lower rates don’t always equal cheaper loans. Check the fees your lender will charge to make an accurate comparison.
- Forgetting About Prepaid Expenses — Depending on your loan, you could be looking at several thousand dollars in cash to close for property taxes, homeowners insurance, and escrow.
Documents You’ll Need before Closing
You’ll be so thankful to have your paperwork ready at the end, when you’re in the last stages of approval. Typical requirements of VA construction lenders will include:
- Certificate of Eligibility (COE)
- Government Identification
- Purchase Contract
- Construction contract
- Approved builder documentation
- Building permits (where applicable)
- Homeowners Insurance information
- Builder’s Risk Insurance information
- Updated proof of income
- Bank statements reflecting clear funds at closing
Send your closing paperwork in early to keep things on schedule.
VA Construction Loans: Your Path from Blueprint to Key
Getting VA construction loan closing costs is tricky. You’ll need to assemble a team of experienced pros to make sure your military benefits aren’t taken advantage of by predatory fees. VA loan pro Shirley Mueller, Sr. VP of Veteran Lending, has devoted herself to helping veterans secure the most affordable loans available.
From reviewing builder specs to trimming out those non-allowable junk charges, Shirley handles it all in every step of the transaction. Our veteran loan pros will turn your house blueprint into your new home, with 100% transparency, guaranteed!
Want to start building your dream home for $0 down? Head to VA Construction Loans to pre-qualify and see exactly how much closing costs you’ll have!
Frequently Asked Questions
1. Are VA construction loan closing costs higher than regular VA loans?
Yes, generally. VA construction loans tend to cost more at closing than standard VA purchase loans, since builder review, draw inspections, and ongoing construction administration require specific lender costs that a standard loan doesn’t have.
2. Can I finance my closing costs?
Typically, the answer is no – you won’t be able to roll typical 3rd-party title and lender charges into your mortgage. That said, you can roll the VA Funding Fee, builder contingency reserves, and interest-only payment reserves into your overall loan balance.
3. Does the VA funding fee count as a closing cost?
Sure, the VA Funding Fee is another closing cost you will need to pay. But here’s the best thing: unlike most fees that are upfront, the VA allows you to add it to your VA mortgage, so you won’t have as much to pay upfront.
4. Do I pay closing costs before construction starts?
Yes. You do. All non-financed closing expenses for a VA construction loan are due when you sign the documents. That final signing can’t happen until after your builder is cleared to pull permits, lay the slab, and get building! The property must remain proposed construction at closing. Structural work, including footings, foundations, or a slab, cannot already be completed.
5. Can the builder pay the closing costs?
Yes. Builder credits may be negotiated, subject to the construction contract, interested-party contribution limits, and current lender guidelines. Builder credits are very effective and will help you save cash and require less upfront money at closing.
6. Can I negotiate lender fees?
Yes, you can definitely shop multiple lenders to see what you get in terms of origination fees. VA guidelines generally allow lenders to charge either a flat 1% origination fee or itemized, reasonable and customary charges — confirm with your lender which structure applies to your loan.
7. Are closing costs tax deductible?
Keep in mind that some closing costs may be tax-deductible, such as prepaid mortgage interest or your VA Funding Fee. Talk to a tax professional or CPA to find out which construction-related deductions you qualify for.
8. What is the difference between cash to close and closing costs?
There are a bunch of third-party and lender services you need to pay to underwrite your loan – those are the closing costs. And there’s the final amount of cold, hard cash you’ll have to pay at closing once all your concessions are factored in. That’s your cash to close.
