FHA vs. VA: Best Construction Loan Showdown for Your Dream Build

At BuildBuyRefi—a 50-state, veteran-owned construction lender—we know how overwhelming it can feel to choose the right construction loan for your dream home.

You might be caught in the crossfire between FHA and VA options.

Which one offers the most flexibility, potential savings, and ease of approval?

In this guide, we’re putting FHA vs. VA in a head-to-head “best construction loan” showdown so you can make an informed, money-saving decision that brings your dream home to life without the usual headaches.

Also, don’t worry—we offer both FHA and VA loans and Conventional, USDA, and Portfolio options. So, no matter what you’re looking for, we most likely have an in-house division to serve you with successful closings.

Introduction: Building Smarter with FHA or VA

Whether you’re serving in the military, a veteran, or just want a low down payment path to new construction, FHA and VA loans have distinct benefits. While FHA is open to all qualified borrowers, VA loans cater specifically to eligible service members, veterans, and surviving spouses.

Let’s dive into the key differences and why it matters for your future home.

The Foundations: Understanding FHA and VA Construction Loans

What Is an FHA Construction Loan?

An FHA construction loan is a government-backed mortgage designed to make homeownership more attainable. It generally wraps land purchase, construction costs, and permanent financing into one package.

• Key Features:

  • Down payments as low as 3.5%

  • Open to first-time and repeat homebuyers

What Is a VA Construction Loan?

A VA construction loan is guaranteed by the Department of Veterans Affairs for eligible military borrowers. Like FHA, it combines land, construction, and permanent financing into one streamlined product.

• Key Features:

  • No down payment for most borrowers

  • No Private Mortgage Insurance (PMI)

  • Competitive interest rates

  • Exclusively for eligible service members, veterans, and surviving spouses

The Showdown: FHA vs. VA Construction Loans

1. Eligibility—Who Gets to Apply?

FHA Construction Loans

• Open to most U.S. citizens and permanent residents

• Minimum credit score is often 580 for purchase (some lenders ask for 640+ on construction)

• Debt-to-income ratio is usually capped at around 43%

VA Construction Loans

• Limited to eligible veterans, service members, or surviving spouses

• No official minimum credit score (lenders typically prefer 620-640+ on construction)

• More flexible debt-to-income rules

Verdict: FHA wins for broader eligibility, while VA takes the crown for military borrowers seeking extra perks.

2. Down Payment Requirements

FHA Construction Loans

• Minimum 3.5% down

• Land equity can offset your down payment

VA Construction Loans

• Often, no down payment required

• 100% financing possible with lender approval

• Land equity can also help eliminate out-of-pocket costs

Verdict: VA excels with zero down payment potential, but FHA offers flexibility for those who don’t qualify for VA benefits.

3. Interest Rates—What’s the Damage?

FHA Construction Loans

• Rates lower than many conventional loans, but can vary widely

• Impacted by credit score, market conditions, and lender policies

VA Construction Loans

• Often, some of the lowest rates available

• Rates for construction loans can be marginally higher than standard VA loans but remain competitive

Verdict: VA tends to offer lower rates, making it a top pick for long-term savings.

4. Mortgage Insurance: The Hidden Cost

FHA Construction Loans

• Upfront MIP = 1.75% of the loan amount

• Annual MIP ranges from 0.45–1.05% of the outstanding loan amount

• Usually required for the loan’s lifespan

VA Construction Loans

• No monthly mortgage insurance

• One-time VA funding fee (often rolled into the loan)

  • VA-Backed Purchase or Construction Loan Funding Fees (As of April 2023):

    • First-time VA loan users pay 1.5% of the loan amount with 5-9.99% down payment, or 1.25% with 10%+ down payment

    • Subsequent VA loan users follow the same structure: 1.5% fee with 5-9.99% down, or 1.25% fee with 10%+ down

    • These rates remain in effect until November 14, 2031

    • Other VA loans (cash-out refinances and IRRRLs) have different fee structures

    • Veterans with service-connected disabilities may be exempt from funding fees

• Funding fees waived for many disabled vets

  • VA Funding Fee Exemptions:

    • Veterans currently receiving VA compensation for service-connected disabilities

    • Veterans eligible for VA compensation but receiving retirement pay instead

    • Veterans rated eligible for compensation based on pre-discharge disability examination

    • Active duty service members entitled to receive compensation

    • Surviving spouses of veterans who died in service or from service-connected disabilities

    Important Notes:

    • If your disability claim is pending at closing, you must pay the funding fee

    • If VA awards compensation with an effective date before your closing, you may get a refund

    • Your Certificate of Eligibility (COE) shows your exemption status

    • Lenders may request additional documentation like VA Form 26-8937 to verify the exemption

Verdict: VA scores a big win with no ongoing mortgage insurance.

5. Property Requirements—What Can You Build?

FHA Construction Loans

• Must meet FHA property standards

• We can finance single-family homes, 2–4 units, or manufactured housing using our in-house FHA construction loans.

VA Construction Loans

• Must meet VA property standards

• Primarily covers single-family homes (multiple styles) or specific farm residences

• 2-4 units (if one of the units is primary-occupied)

Verdict: FHA is more flexible in property types, while VA is generally limited to single-family structures.

6. Loan Limits—How Much Can You Borrow?

FHA Construction Loans

• County-dependent limits (e.g., $524,225 base in most areas for 2025)

• Higher limits in pricier areas, up to $1,209,750 (single-family) in 2025

• Likely to increase in future years

VA Construction Loans

• No strict loan limits if you have full entitlement. However, we may offer up to $3.5 million max on an exception basis with compensating factors

• Partial entitlement can trigger county limits

• High loan amounts are possible with a strong financial profile

Verdict: VA stands out with no official cap for borrowers with full entitlement.

7. Land Options—Leveraging Your Assets

Both FHA and VA allow you to:

• Buy land and build, all in one loan

• Refinance land you currently own into the construction loan

• Use land equity to reduce out-of-pocket expenses

This flexibility can make a huge difference if you already own land or find the perfect lot mid-process.

8. One-Time Close vs. Two-Time Close

• One-Time Close: Single closing for both construction and permanent mortgages.

  • One application, one set of closing costs

  • Rate locked at the beginning

• Two-Time Close: Separate construction loan and permanent mortgage.

  • Two closings, two applications, and higher overall costs

  • Could lock in a lower rate later if the market improves

The choice depends on your rate expectations and willingness to handle multiple closings.

9. Construction Timeline—We’ve Got You Covered

Most construction loans span 6 to 12 months, but BuildBuyRefi can extend up to 18 months for bigger or more complex builds. A longer timeline helps:

• Custom homes needing intricate designs

• Builds in regions with tough climates

• Rehab or addition-based projects, check out our FHA renovation loan programs

• Construction loan extension help on an as-needed basis or for special circumstances

The Loan Process: From Application to Move-In

1. Application: Gather documents (income, debts, assets) and submit plans.

2. Pre-Approval: We’ll assess your credit and budget to give you a borrowing range.

3. Builder Approval: Ensure your contractor is licensed, insured, and vetted.

4. Processing & Underwriting: We verify your info, run appraisals, and finalize the details.

5. Closing: Sign documents, pay closing costs, and you’re ready to break ground.

6. Funding & Draws: Construction funding is released in stages, often after each inspection.

7. Final Inspection & Occupancy: Once complete, a final inspection leads to your permanent mortgage (for one-time close loans).

Get the Best Lender Add-On Options for Construction Loans

At BuildBuyRefi, we offer unique add-on options to enhance your construction loan experience:

• Up to $50K in Consumer Financing: Cover unexpected costs, fund additional renovations, or tackle new projects without juggling separate loans.

• 30% Off Real Estate Agent Commissions: When buying land or selling property in 42 states, you can apply 30% of the agent’s commission towards closing costs or a rate buydown—potentially saving you thousands.

These best lender add-ons help you manage those last-minute surprises or big-picture goals without breaking the bank.

FAQs—Your Burning Questions, Answered

1. Can I use FHA or VA construction loans to purchase land first and build later?

   • Yes. Both loans allow land purchase, but certain timeframes may apply before construction starts.

2. Do I need perfect credit for these loans?

   • Not necessarily. FHA often requires a 580+ score; VA has no official minimum but lenders usually look for 620+.

3. Can I be my own builder?

   • Typically no. Lenders prefer licensed, approved contractors for security and quality assurance.

4. What if construction costs exceed my loan?

   • You’ll either need to pay the difference out of pocket or explore adding more funds via add-on financing.

5. How do draws work?

   • Funds are released in stages after verified progress inspections, ensuring the build moves along smoothly.

6. Are there VA or FHA renovation loan options?

   • Absolutely. Both offer programs for major renovations or home additions.

7. What if the builder doesn’t finish on time?

   • Extensions may be possible, especially if you arranged for longer timelines in your loan terms.

Making Your Decision: FHA or VA Construction Loan?

Choose FHA if:

• You’re not VA-eligible

• You have a moderate credit score and can handle 3.5% down

• You want more flexibility in property types (multi-units, etc.)

• You don’t mind monthly mortgage insurance

Choose VA if:

• You’re an eligible veteran, service member, or surviving spouse

• You prefer no down payment and no monthly mortgage insurance

• You’re seeking competitive interest rates for a single-family build

• You have full VA entitlement for higher borrowing potential

Conclusion: Building Your Dream, One Loan at a Time

FHA and VA construction loans can pave the way to your dream home—it’s about matching the loan features to your personal goals. From their distinct down payment requirements to their approach to mortgage insurance, each loan offers unique advantages. You may even want to use our construction loan calculator to estimate your payments.

When you choose BuildBuyRefi, you gain a veteran-owned, 50-state lender equipped to guide you through the entire construction financing process—application to final occupancy. Add in our $50K consumer loan option and the 30% real estate agent commission discount for land or property transactions in 42 states, and you’ll see why we stand out from the crowd.

Ready to explore FHA vs. VA for yourself? Reach out to BuildBuyRefi today. Let’s get you pre-approved, break ground, and turn that blueprint into a place you’ll truly call home.