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VA Construction Loans Guide | NextAdvisor with TIME

VA Construction Loans Guide | NextAdvisor with TIME
Written by Publishing Team

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With the housing market as hot as it is now, finding the perfect home is not an easy task.

Those who want to skip the home-hunting competition, or simply want a home tailored to their needs, might consider building a home from scratch with a construction loan.

Conventional construction loans tend to have higher down payment requirements and higher interest rates than mortgages for existing homes. But veterans may be able to bypass some of these hurdles with a construction loan from the Department of Veterans Affairs.

“VA limits closing costs, and a VA home loan guarantee means competitive interest rates. These cost savings can run into tens of thousands of dollars over the life of the mortgage,” says Jeffrey London, executive director of the Loan Guarantee Service at the US Department of Veterans Affairs. real estate”.

What is a VA construction loan?

A VA construction loan is a loan to finance the construction of a new home. It is issued by a private lender but backed by the VA.

Construction loans come in many different forms. Since only construction loans are short-term, high-interest, and designed for home construction, many homeowners choose to take out a construction to permanent loan, which restructures a construction loan into a regular home mortgage after the home is built. This is also known as a one-time locked-in construction loan.

“A one-off closed construction loan combines two loans with one application and closing, and a two-time closed construction loan that has two separate phases of construction and mortgage processing,” said Andrina Valdez, COO of Cornerstone Home Lending, Inc. .

VA loans can be used as one-time loans, but you may have to check with a few lenders before you can find a loan that is willing to finance the construction and mortgage of your home.

professional advice

For best results, look for lenders and contractors who have extensive experience with building and construction loans.

In some cases, this process can require different lenders. So veterans might just choose a construction loan, and then convert that loan into a VA mortgage loan.

How does a VA construction loan work?

Because VA construction loans are partially secured by VA, they are less risky for lenders, which benefits borrowers.

“In most cases, the VA does not require a down payment for VA loans. The VA does not require private mortgage insurance (PMI), so the cost savings are significant for those using the VA home loan program,” says London.

Instead, VA loans require an upfront financing fee. Fees vary depending on the down payment, as well as if you have used a VA loan before. Financing fees can range from 1.65% to 3.6%.

“You will also need to present your building plans when you apply for the loan,” Valdes adds. The lender will consider these plans, along with your money, when deciding whether to issue you the loan. The appraiser will also make the appraisal based on building plans rather than the existing home.

Eligibility requirements

To be eligible for a VA loan, you must be a current or former US military service member. Families of service members may be eligible in some cases.

“Service members and veterans are eligible for the Virginia Home Loan Benefit based on meeting requirements for the nature of layoff and time of service. The first step for any service member or veteran is to obtain a Certificate of Eligibility (COE) from the VA, which the borrower can do themselves or obtain them through the lender of his choice.”

The official VA website contains the full list of requirements, as well as an online application for a COE (Certificate of Eligibility).

Aside from the VA eligibility requirements, you must also be approved by the lender, as for other housing loans. Requirements will change depending on the lender, but the general requirements for most lenders include:

  • personal credit. The lender will have an ideal credit score for the borrowers. But since the loan is backed by VA, you may not need a good grade quite as you would with a traditional loan.
  • Debt to Income Ratio. This number tells lenders how much of your gross monthly income is actually allocated to your existing debt. Many lenders look for a DTI of less than 45% for VA loans.
  • income and employment. Most lenders would like to see you work in the same field of work for a few years, which tells them that you have job security. Your income will also be a factor in how much you can borrow. It is always a good idea to know how much home you can afford based on your income before starting the mortgage process.

How to find a construction loan lender VA

Finding a lender that works with VA loans and is willing to take out a VA construction loan can take time.

“Definitely look for a lender who has experience with VA loans — and ask for some examples/numbers that prove they can close on time,” says Valdez.

A good place to start is your local regional office. The VA has offices all over the country, and they may be able to help you with information about lenders that work with VA loans in your area.

How to get a VA building loan?

The exact steps you will take to obtain a VA construction loan will depend on the lender, your financial situation, and the construction project. Here are some basic steps you can expect to follow:

  1. Confirm eligibility with the VA and apply for a Certificate of Eligibility (COE). Before planning your home, make sure you qualify for a VA loan. You will also need to apply for a Certificate of Eligibility (COE) to prove to the lender that you qualify. You can find the full list of eligibility requirements, as well as an online application for a COE, on the official VA website.
  1. Find a lender and builder. After you have your Certificate of Excellence owned by you, you will need to find a lender and builder to work with. It is a good idea to use lenders and contractors who are familiar with the VA loan process. This is especially important due to the high risk and complexity of using a VA loan for construction purposes. If you do not already own the land you plan to build on, you may need to secure separate financing to purchase the land.
  1. Submit plans and schedule for approval. Once you find the right lender that will agree to finance your VA construction loan, all of your building plans, budget, schedule, and contractor will need the lender’s approval. The lender also checks your personal finances to ensure that you can repay the loan amount. This approval process may take some time to complete.
  1. Get a home appraisal based on plans. Unlike a regular mortgage, the home that needs appraisal does not yet exist. Therefore, the appraiser will make the evaluation based on the proposed building plans submitted by your builder.
  1. Close the loan and start building. If you are approved, your lender will look at the schedule as a guide to disbursing the loan funds to your contractor as needed. While building your home, you will pay interest on the construction loan. Once the construction is completed, you will enter the repayment period of the construction loan, or the loan can be restructured into a conventional mortgage.

Pros and Cons of a VA Construction Loan

Negatives

  • Upfront finance fee (waived in some cases)

  • Lenders can be hard to find

  • You must apply for and obtain a Certificate of Eligibility (COE)

Should You Get a VA Building Loan?

Because of the favorable terms that come with VA loans, this is a good option to pursue home building, as long as you can meet the qualifications of a VA home builder loan.

With no mortgage insurance, VA loans often cost borrowers less. But it can be hard to find lenders that offer VA loans, especially if it comes to construction.

says Chris Roberts, Loan Officer at Loan Simple, Inc. In the Denver area: “Don’t be afraid to interview several lenders and find someone to really do business with — someone who’s on the ball, and answers your calls and questions quickly.”

If you have good credit and enough savings for the down payment, you may qualify for a standard construction loan with similar terms. While VA loans offer financial benefits, there are more paperwork and eligibility requirements. Making the best choice about the loan — and the lender — means keeping the overall picture in mind.

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