What Is an Interest Reserve in a VA One-Time Close Construction Loan?
If you’re a Veteran planning to build a home using a VA One-Time Close Construction Loan, you may encounter a line item called interest reserve in your loan estimate. In this article, we’ll explain what interest reserve is, how it works, and why it’s a powerful tool for Veterans building a custom home.
What Is an Interest Reserve?
Interest reserve is a pre-funded amount built into your loan that covers monthly interest payments during construction. It ensures you don’t have to make out-of-pocket payments while your home is being built.
How Interest Reserve Works with a VA Construction Loan
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Your builder receives funds in draws as each construction milestone is completed.
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Interest accrues only on the amount drawn, not the full loan.
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The lender uses the interest reserve to automatically pay monthly interest on your behalf.
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You won’t make any monthly payments during construction.
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The interest reserve is added to your construction contract price and included in the overall loan. It does not affect the builder’s funds or contract amount.
Benefits of Interest Reserve for Veterans
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No Monthly Payments During Construction
Gives you breathing room while you rent, relocate, or transition from military service. -
Built Into the Loan
No surprise bills—interest is covered and included in your financing. -
No Double Housing Costs
You won’t have to pay rent and a construction loan at the same time. -
Reduces Financial Stress
Enjoy peace of mind knowing interest payments are handled from day one.
What Happens if Interest Reserve Isn’t Fully Used?
If construction finishes early or less interest accrues than estimated, unused reserve funds are applied back to your loan balance, reducing your principal.
Is Interest Reserve Unique to the VA One-Time Close Loan?
No—but VA construction loans are unique in how Veteran-friendly the process is:
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$0 down payment
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No PMI
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Fixed interest rate from the beginning
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One closing (no need to refinance)
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Property tax exemption for qualifying disabled Veterans
The interest reserve is one more way the VA One-Time Close Construction Loan makes building a home simpler and more affordable for Veterans. It’s designed to support you, not burden you.
Start Building Today
Ready to use your VA benefit to finance your custom home with no payments during construction and $0 down?
