The VA construction loan is a powerful financing option for veterans and active-duty military members looking to build their dream home. It combines the benefits of the VA loan program, such as up to 100% financing, with the convenience of all-in-one construction-to-permanent financing.
The VA construction loan allows borrowers to finance the cost of home construction, lot purchase/land payoff, and the permanent mortgage in a single closing. This eliminates the need for a second closing, saving time and money for the borrower.
Additionally, the VA One-Time Close Construction-to-Permanent Loan eliminates the need for borrowers to re-qualify for a permanent mortgage once the home construction is finished. This provides peace of mind for the borrower, as they know that their financing is secure and in place from the start of the construction process.
Furthermore, VA One-Time Close Construction loans also have no down payments, no private mortgage insurance and no prepayment penalties making them highly beneficial and suitable for veteran borrowers.
VA Construction Loan Eligibility Overview
Are You Eligible For the VA Construction Loan? In most cases, if you are a Veteran, Active Duty Service member or a former/current member of the National Guard or Reserves you will qualify for the VA construction loan or also known as the VA one time close construction loan.
The following are the basic eligibility requirements for the VA one time close construction loan. For a comprehensive list of requirements call us at (855) 956-4040 to learn more.
- Minimum FICO score of 620 is required for base loan amounts up to $726,200, and a minimum FICO score of 640 is required for base loan amounts above $726,200.
- Maximum loan amount is $1.5 million. Loan amounts greater than $1.5 million require prior approval from AFR.
- This loan is only available for primary residence, including 1 unit site-built, new manufactured housing, multi-wide housing, and modular homes.
- A Certificate of Eligibility (COE) is required for this loan.
- The borrower is not allowed to perform any of the work themselves.
- The builder must provide a one-year VA Builder’s warranty.
- The General Contractor must be registered with the VA and carry sufficient insurance through a current general insurance liability policy.
- VA regulations require periodic inspections of properties under construction.
VA Construction Loans, What are the 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 home 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. Call us at (855) 956-4040 VA construction loan lender.
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 Construction Loan Process
Once you choose a lender and decide the VA construction loan is right for you, 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 department of veterans affairs 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
In conclusion, the VA One-Time Close Construction-to-Permanent Loan is a valuable financing option for veterans and active-duty military members looking to build their dream home. It offers the convenience of all-in-one financing, the security of a permanent mortgage, and the benefits of VA loans. Call us at 855-956-4040. Thanks for reading, and from all of us a National VA loans, thank you for your service!
