From Just A Dream to Keys in Hand: A Contractor’s Guide to VA Construction Loans

 

What counts as “VA Construction”

  • VA allows Veterans to build a new primary residence using either a one-time close (construction/permanent) or a two-time close structure. In OTC, you close once, funds are disbursed in draws during the build, and the loan modifies to permanent terms at completion. Two-time close uses interim financing, then refis to a VA permanent loan at completion. Benefits+1

  • Appraisals can be ordered from plans & specs, VA issues a Notice of Value (NOV), and a post-construction inspection by the VA appraiser verifies the home matches the approved exhibits and VA Minimum Property Requirements (MPRs) before guaranty. Benefits

  • Builders must provide a 1-year builder warranty (VA Form 26-1859); in some jurisdictions without local inspections, a 10-year insured plan is required in addition to VA’s 1-year warranty. Benefits+2VBA+2

  • Update that helps builders: VA removed the VA builder identification number requirement for new/proposed construction in the guaranty program (effective Mar 31, 2025). You still must meet state/local licensing and compliance. Benefits

Why builders should be excited

  • Bigger buyer pool, zero-down potential: Qualified Veterans often bring no VA-required down payment (subject to NOV and entitlement), which can keep deals moving even when cash is tight. (Program mechanics in Ch. 7.) Benefits

  • Single close ≈ fewer moving parts: OTC means one closing, one set of docs, one title policy, then a simple modification to permanent after the final inspection—less churn than some private-construction + takeout structures. Benefits

  • Predictable draw management: VA permits escrowed draws aligned to milestones; lenders must obtain the Veteran’s approval before disbursements, which keeps expectations clear and reduces disputes. Benefits

  • Plan-based valuation: Appraisal from plans & specs gives you cost/allowance clarity earlier in the cycle, helping you lock scopes and schedule subs sooner. Benefits

  • Warranty structure that sets expectations: The 1-year warranty (and 10-year insured plan when required) sets a known standard. VA’s role in defect complaints is limited and time-bound—so your obligations are defined up front. Benefits

  • Less admin friction: The builder ID# elimination removed a recurring paperwork step many shops disliked. Stay licensed, insured, and compliant locally—and you’re good. Benefits

Myths vs. Facts

  • “VA takes forever.”
    Fact: Timelines hinge on complete exhibits and local appraisal turn times. VA provides a step guide for OTC processing; with plans/specs ready, NOVs and draws flow efficiently. Benefits

  • “VA will make us fix everything, forever.”
    Fact: VA’s assistance is limited; the builder supplies the 1-year warranty, and where there are no local inspections, adds a 10-year insured plan. Beyond that, VA doesn’t “run punch lists.” Benefits

  • “You must get a VA builder ID before we start.”
    Fact: Not anymore for VA-guaranteed new/proposed construction. The 2025 circular removed that requirement. Benefits

  • “Appraisals can’t be done until it’s framed.”
    Fact: Appraisals are done from plans & specs with a post-construction site visit to confirm completion to NOV/MPRs. Benefits

Contractor checklist (save this)

Company & contract

  • State/local license, insurance, and bonding documentation. (No VA builder ID needed post-3/31/25.) Benefits

  • Fixed-price contract with allowances, clear change-order language, and a milestone-based draw schedule that matches lender requirements. Benefits

Plans & exhibits

  • Full architectural plans, specs, site plan, utility confirmations, permits plan, and HOA/ACC approvals (if applicable). Benefits

  • Warranty: VA Form 26-1859 (1-year builder’s warranty) and, where required, 10-year insured plan. Benefits+1

Lender coordination

  • Appraisal ordered as purchase; loan use “Construction to Permanent”; building status “Proposed.” Benefits

  • Veteran sign-off process for each draw and documentation of milestones/inspections. Benefits

“Ideas → Keys” timeline

  1. Concept & budget alignment

    • Meet with the Veteran and lender to validate COE/entitlement and budget. Discuss OTC vs. two-time close options. Benefits+1

  2. Exhibit lock-down

    • Finalize plans/specs, site plan, allowances, permits path, and a fixed-price contract. The better the exhibits, the faster the NOV. Benefits

  3. Appraisal (plans & specs) → NOV

    • Lender orders the appraisal as “Construction to Permanent / Proposed.” NOV issued with any completion conditions (e.g., final grading/drive, landscaping). Benefits+1

  4. OTC closing & draw escrow setup

    • Single closing. Construction proceeds are placed in a controlled escrow. Draws require your milestone docs and the Veteran’s approval before release. Benefits

  5. Build phase & inspections

    • Follow local inspection cadence; when local inspections are absent, the lender certification + warranty structure applies. Keep change orders tight to avoid re-underwrites. Benefits

  6. Warranty docs & completion items

    • Prepare VA Form 26-1859 (1-year) and, if applicable, the 10-year insured plan. Ensure NOV conditions are completed. Benefits

  7. Post-construction VA appraisal inspection

    • VA appraiser confirms the home matches the exhibits and MPRs. Address any final items promptly. Benefits

  8. Modify to permanent & move-in

    • Loan modifies to permanent terms; VA issues guaranty. Keys, photos, referrals. Benefits

Draw schedule tips 

  • Front-load clarity, not dollars: Use a 5–7 milestone schedule (e.g., slab/foundation, framing, MEP rough-in, drywall, cabinets/trim, substantial completion, final). Collectable, photo-verifiable milestones help releases go faster. Benefits

  • Veteran sign-offs: Set a same-day approval habit with the buyer; lenders must obtain Veteran authorization for each disbursement. Benefits

  • Change-order discipline: Lock selections early; material swaps can trigger appraisal or underwriting re-checks that slow draws. Benefits

Common pitfalls 

  • Vague allowances → NOV surprises

    • Fix with a complete, fixed-price scope in the exhibits before the appraisal order. Benefits

  • Inspection gaps in areas without a local authority

    • Provide both the 1-year builder warranty and the 10-year insured plan and coordinate lender completion certification. Benefits

  • Admin drag from old rules

    • Stop chasing the VA builder ID; it’s no longer required for VA-guaranteed new/proposed construction. Benefits

FAQs contractors ask us

Q: Can we start site work before the OTC close?
A: Limited prep is common, but coordinate with the lender so costs and timing align with acquisition-cost rules and the NOV. (See Ch. 7 processing guide.) Benefits

Q: Who approves draws?
A: The lender administers the draw escrow and must obtain the Veteran’s approval for each disbursement; your milestone docs and any required inspections are part of the release. Benefits

Q: What exactly is the warranty requirement?
A: Provide VA Form 26-1859 (1-year builder warranty). If the locality doesn’t perform inspections, include a 10-year insured plan as well. Benefits+1

Q: Do we need a VA builder number?
A: No, not for VA-guaranteed new/proposed construction after Mar 31, 2025; maintain normal licensing/insurance. Benefits

How we partner with contractors (fast, clean, repeatable)

  • Pre-flight package: We review your standard contract, draw schedule, and warranty language against VA Chapter 7/10 checkpoints. Benefits+1

  • Exhibit checklist: Plans/specs/site/permits/HOA, templated for “plans & specs” appraisal. Benefits

  • Milestone cadence: A simple draw calendar with same-day Veteran approvals. Benefits

  • Weekly status updates: Appraisal‐NOV-build-inspection tracker your team can follow without extra emails.

If you’re a builder in TX, FL, AL, CO or TN, let’s co-create a VA-ready spec packet so every Veteran client can go from idea to keys without friction.

Sources 

About Between Two Doors

Between Two Doors is a podcast where I talk with Realtors about their journey, aiming to connect home buyers and sellers with agents on a more personal level. I ask "right brain" questions that go beyond transactions, focusing on the experiences, values, and passions that make these professionals great at what they do.

Listen to more episodes at: https://www.betweentwodoors.com

Sponsored by:
ProLending Mortgage, LLC.
https://www.natecarver.com

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