Have you ever thought of building a home from scratch? Imagine building a house exactly to your specifications. Just the right amount of rooms, on the perfect lot with the upgrades that mean the most to you. For a lot of people, it’s a pipe dream. Sure, if you have the cash on hand, there’s no worry. But construction loans are complicated things, riddled with rules, timetables and legalese that make it hard to understand, right? Besides, you’re a Veteran. You want to be able to use your home loan benefits because having been in the military the past 4+ years, you need a home for your family now. You can’t wait 10 years to save for a down payment. Well, we have good news for you. With the VA One-Time Close Construction Loan your dream may be a reality. You can use almost all the same benefits to build a house from the ground up as you would if you were buying an existing structure. And what’s more, a good lender will walk you all the way through the process making the whole journey easier. If you ever thought of building a home, it’s worth your time to investigate. And we are here to help!
VA Construction Loan Basics
The VA offers a unique VA construction loan program for veterans wanting a new home construction. It’s called a VA One-time Close Construction Loan, also known as a Construction-to-Permanent Loan. We’ll go into more detail below, but in a nutshell, this loan allows you to apply for and obtain a loan that covers all costs incurred during the building of your new home. When construction is complete, the loan automatically converts to a regular mortgage. It eliminates the hassle you see with traditional construction loans where you apply for, and close on, a construction loan only to re-apply for, and close a second time, to convert the construction loan to a final mortgage.
Are You Eligible For the VA Construction Loan?
In most cases, if you are a Veteran, Activity Duty Service member or a former/current member of the National Guard or Reserves you will qualify for the VA One-Time Close Construction Loan. There are minimum service requirements in place just like with the standard VA Home Loan Program and vary depending on the time period in question. For example, you only need to have served 90 consecutive days if you served during a period of war. If you served post wartime, typically you need 181 days for post-Vietnam war or 24 continuous months if you served between the years 1980 – 1990. Click here For more information on VA loan eligibility.
VA Construction Loan Benefits
Conventional construction loans are inherently different from traditional lump-sum mortgages. They tend to be short term loans, usually with a duration of 12 months. The lender initially holds onto the money and pays it out in increments as the house advances through various stages of construction. The schedule of these draws, as they are called, is usually drafted at the beginning of the loan period and are based on the construction schedule provided by your builder. The VA One-time Close loan offers many advantages over a conventional construction loan if you meet the eligibility requirements. The biggest benefits are:
Savings – As mentioned above, conventional construction loans often require two closings. This means double closing costs. Not only do you have to close on the construction loan, you also have to close on the conversion of the loan to a permanent mortgage. With your VA One-Time Loan, there is only a single loan and therefore one closing. Since you usually have to pay closing costs out-of-pocket, this can save you thousands of dollars and not impact your cash flow.
Interest Rates – Very often, banks consider a construction loan high risk. Usually the lender will use the house your buying as collateral to secure the loan. With a construction loan, there is no house yet, so therefore no collateral. When risk goes up, so does the interest rate. Not so with a VA loan. The Veteran’s Administration guarantees 25% of the loan on your behalf, which greatly reduces any risk to the lender. While the interest rate may still be higher than if you were applying for a mortgage on an existing structure, comparably the interest rate will usually be lower. You also will lock in that interest rate right from the start. If rates start to drift upward as you build, you’ll know your safe with the loan you have. What if the rates drop considerably by the time your house is finished? If that happens, you can look into VA refinancing options when you’re ready to convert to a permanent loan. Sometimes, if the rates drop enough, it can be worth the extra closing costs. Your lender can help you work out your options.
One Underwriting Process – As we talk about the two closings necessary for traditional construction loans, keep in mind that this also means you have to re-qualify for the loan when it’s converted to a permanent mortgage. a typical building schedule for a new house is anywhere from 4-6 months minimum, and often can take longer due to construction delays. A lot can happen to the economy during that time that may affect your financial situation. The peace of mind that comes with a single close loan, requiring only one underwriting process, is worth its weight in gold.
No Payments During Construction – Obviously, you will still need somewhere to live while your house is being built. This program offers a special perk – once you are approved and close the loan, there is an option to defer your payments until construction on your new house is complete as long as the loan is paid off within the initially agreed upon term. For example, if you opted for a 30-year fixed-rate term, and your house takes 8 months to build, your payment schedule would be based on the remaining 29 years and 4 months. Because paying rent at the same time as a new mortgage is often more than many people can handle, it’s usually worth it. It’s just one more benefit the VA offers to get you closer to your dream home.
More Options – You aren’t only locked into a new construction home. You can use the One-Time-Close construction loan to fund Specialty Adaptive Housing construction as well. All too often our military service members that deal with service-connected disabilities require changes to their home to accommodate their special needs. This program gives the help needed to veterans and their families to make sure they are comfortable when they return home.
All Other Benefits Stay the Same – Along with all of the above, the general benefits that come with a VA Home Loan still apply. You can still choose to finance 100% of the loan with no Private Mortgage Insurance (PMI). You still benefit from the relaxed underwriting requirements extended to veterans. And If you prefer, you are also allowed to roll the closing costs and interest charges that accrue throughout the construction period into the loan. While this may help with cash flow up front, remember that rolling these costs into the loan may result in owing more on the house than its appraised value. It might be to your advantage to put money down if this is an option for you.
VA One-Time Close Construction Loan Things to Know
There is no doubt that the VA one-time close construction loan is a great program for a veteran looking to build a new home. But there are a few things to be aware of before you jump into the process. None of the following are reasons to shy away from the loan, but they are things that you should take into account when making your decision.
Lenders – Not all VA lenders offer construction loans. You may have to do a more extensive search to not only find a lender who works with these loans, but one who knows the process inside and out. There are a lot of moving parts to One-Time-Close construction loans, so finding someone knowledgeable is paramount. Luckily, we can help you there as we are well versed in all the guidelines for these loans.
Inspections – As with a regular VA Home Loan, the inspection process is a bit more stringent than with conventional financing. This may slow down your process slightly, but it’s worth it. VA Loan inspections are more in-depth because since they guarantee the loan on your behalf, they want to be absolutely certain that you are getting a quality home. Another thing to consider is that each draw on the construction loan has its own set of inspection and recording fees. This could increase the overall amount of your closing loans.
Builder – the contractor you choose must be registered and possess a valid VA builder identification number in order to build the house. You, as the borrower, must have an arms-length relationship with the builder as well. You can’t hire your brother, or your father-in-law. And you also can’t participate in the building yourself. There can be no potential conflict of interest between you and the contractor. The builder must be willing to provide building plans and specs, as well as filling out Form 26-1852 listing out all building materials they plan to use for approval. This will help the VA appraiser confirm that the new house will meet minimum property requirement guidelines put in place by the VA.
Funding Fee – In case you were wondering, this loan program is still subject to the VA Funding Fee. What is the Funding Fee? While regular closing costs are charged to you by the lender and include such things as attorney fees, and appraisal costs, the Funding Fee comes directly from the VA. The VA Funding Fee exists to reduce the cost of the program to taxpayers considering that there is no down payment or Private Mortgage Insurance (PMI) associated with VA loan programs. It protects the borrowing rights of future Service Members and Veterans. It’s calculated using a percentage of the total amount of the loan. That percentage is determined by several factors, including whether you choose to make a voluntary down payment, if you’re a first-time user, or your military category. Want to know more? Our in-depth article on the VA Funding Fee will give you everything you need to know.
How Does The VA Construction Loan Process Work?
Once you choose a lender, the first step will be to submit the plans and specifications for the house to the Veteran’s Administration. Your builder will fill out Form 26-1852 which lists out the materials used during construction and submit that to the VA along with a set of plans for the house. The lender will order a VA appraisal on the home to confirm the loan is equal to the value of the finished home. As each stage of construction is completed, a VA inspector will approve the work and authorize a draw from the construction loan to pay your builder. You should check in with your builder every once in a while, to make sure this is being done. Once construction is completed, the VA will ensure that all building codes were properly adhered to and sign off that the home meets minimum property guidelines required by the VA. Once that is completed you will need to send proof of warranty to the VA. Most builders offer the one-year warranty that is required by the VA. It’s at this point that the loan will automatically convert, and your regular mortgage payments will begin.
VA Construction Loan Summary
Now you know that it’s possible to realize the dream of building your own house while taking advantage of your VA benefits. VA One-Time Close Construction Loans offer you:
· Savings with only one set of closing costs.
· Peace of mind with only one underwriting process.
· Security of knowing you can defer payments until construction is complete.
· All the other benefits of a VA Home Loan, including no down payment, no private mortgage insurance, lower interest rates and relaxed qualification guidelines.
It may seem a bit overwhelming, but by taking it one step at a time and leaning on your lender for help, the journey is well worth the payoff at the end. To find out more, call us at 855-956-4040. Thanks for reading, and from all of us a National VA loans, thank you for your service!