What is a VA loan for construction?
A VA construction loan is a loan for the construction of a home. It works in the same way as other types of construction loans.
With a VA loan you can borrow the amount needed to buy a house and pay it back with interest over a fixed term. You pay for the build with a VA construction loan through a series fund “draws” that you make as different phases of the construction are completed.
You can use a VA construction loan to finance the purchase of land and construction. Many times closing costs can also be rolled into the loan and financed. Depending on the circumstances, you may not have to pay a downpayment. In general, you won’t need to deposit money if your price is higher that the appraised value.
There are two main types for VA construction loans:
- Construction-to-permanent or one-time/single close loan – With a construction-to-permanent loan, one loan covers the cost of the project, and then converts to a “regular” mortgage to repay what was borrowed. You only need to complete the paperwork and pay the closing costs once with this arrangement.
- Construction only or two time close loan – One loan pays for construction. Once the project is finished, however, you will have to get another loan to repay it. This means that you will have to complete two loan closings and be eligible for the second loan.
VA construction loan requirements
You must meet several requirements in order to qualify for a VA Construction Loan. These are the other eligibility requirements.
- Certificate to eligibility – The VA will issue a Certificate or Eligibility (COE). You can either file online or mail the VA Form 26-1880 directly to your local VA office.
- Credit score While there’s no minimum credit score for the VA, it is possible that you will need to meet the minimum requirements of the lender you are working with. This usually means a credit score at least 620.
- The debt-to income (DTI), For most VA loans, you’ll need a DTI of less than 41 percent. There are exceptions to this rule (e.g. if your income is tax-free). You must also show that your residual income (which is what you have after paying other debts) can be used to repay your loan payments.
- Funding fee You don’t need to pay mortgage insurance in order to obtain a VA loan. However, you must pay a funding fee. The amount of the funding fee depends on how often you have used VA loans and how much down you paid.
- Construction Plans – Your construction plans must be submitted to the lender. This includes blueprints and materials. You will also need an appraisal to determine the property’s value. Before you can move forward, you will need a VA property certification.
- Builder approval To use a VA approved lender, you will also need an approved builder. Your builder should either be registered already with the VA or register to get approval from it.
- Warranty The builder must provide a minimum one-year warranty or an insured 10-year coverage plan.
These conditions have been met, and you are approved for construction loans. A VA inspector will follow the project closely every step of its journey. Each stage of the construction process is reviewed by the inspector, who will then approve additional draws to pay costs.
What can I build using a VA Construction Loan?
VA construction loans cannot be used to build a single family home. These loans can’t be used to build multi-family housing, or any other project. Although you have the ability to make minor modifications to your home, it is best to not go too far from the norm. You should ensure that the home you create is comparable in size and style with other homes in your area. You should also consider the size of your lot. If you are planning to build, ensure that it is comparable in size to other properties in the vicinity.
VA construction loan vs. construction loan
Regular construction loans have more stringent underwriting requirements. They also require a higher credit score and DTI criteria. A substantial down payment will be required to obtain a regular construction loan.
You don’t typically need to pay a down payment for a VA construction loan. Also, credit requirements are more flexible. A VA construction loan can be much easier for veterans to obtain than a regular loan.
VA construction loan rates
In general, construction loan rates are higher than mortgage rates used to purchase an existing home. This is because a mortgage loan is secured, which means that the collateral is your home. The mortgage lender can recover its losses by selling this collateral if you default on payments. Because the home isn’t yet built, lenders don’t have the option of a construction loan. Therefore, the lender takes on more risk and sets rates accordingly.
You should note that the interest rates charged by individual lenders for VA construction loans are different from those charged by the VA. A lender’s rates can change at any time during the day.
The pros and cons of VA construction loans
Pros
- There may not be a downpayment
- For certain veterans with service-connected disabilities, there is the possibility of having the funding fee waived
- No mortgage insurance
- Can you roll closing costs into your loan?
- Credit and income requirements are relaxed
Cons
- Approval must be obtained from the VA for both the builder and the lender
- Sometimes appraisals take longer.
- Closing cost can be higher due funding fee and other expenses
- Cost barriers can include funding fees
- Construction loan rates are often higher
How difficult is it to get a VA loan for construction?
VA construction loans aren’t available from all mortgage lenders, so it might be more difficult to get one. VA construction loans are not subject to a down payment and often have more stringent requirements. VA construction loans may have additional property requirements. If your lender has any overlays or requirements, it might make it harder to get approved.
Where can you find a VA lender for construction loans?
Not all VA loan lenders can also lend to VA construction loans. A lender might provide a VA mortgage for home purchases, but not a VA loan that can be used to build a house. Start by visiting the VA website for a list of approved lenders. Below is a list containing some lenders and brokers who offer this type of loan.
- American Financial Resources
- CHM Lending
- GO Mortgage
- Security America Mortgage
- University Lending Group (University Bank).
- VA Nationwide Home Loans – Magnolia Bank
A lender with experience in VA construction loans can be a benefit. There are many requirements and steps involved. If possible, compare rates and terms from different lenders before accepting a VA construction loan offer.
