If you served in any branch of the United States military, you have multiple advantages and benefits when it comes to certain financial processes. For example, if you want to construct a new home, you are eligible for a loan that doesn’t require any form of down payment.
Normally, any financial institution requires a down payment when you request a loan. However, because the U.S. Department of Veterans Affairs guarantees these loans, this requirement is overlooked in these cases.
This loan opportunity has significant benefits and is worth considering if you’re in the market to become a homeowner. There are several key pieces of information you should be aware of before you move forward with a VA construction loan. This article will highlight VA construction loan requirements, VA guidelines, construction closing costs, monthly mortgage payments, and other areas of importance.
What Is a VA Construction Loan?
A VA construction loan (not to be confused with a VA home loan) is a short-term financial arrangement that covers the cost of building a home, similar to types of construction loans.
When you use a VA loan to finance a home, you borrow the amount required to cover the price of a home. You have a specific amount of time to repay the loan and the interest that’s added to the total amount borrowed.
However, when the situation entails a VA construction loan, you don’t receive the total amount and pay for the home in one transaction. Instead, the construction is covered using a series of draws that fund the project as different phases of construction are finalized.
When you use a VA construction loan, you’re able to finance the land and the money to cover the cost of building the home. Closing costs can also be worked into the loan and financed as well. In many situations, the down payment is usually overlooked, assuming the price isn’t higher than the official value after appraisal.
This covers VA home loans and VA construction loans. The latter can be even further divided into two specific types of loans:
Construction-to-Permanent or Single Close Loan
With this specific type of loan, one figure will cover the entire project’s cost. This loan is then converted into a standard mortgage to pay back what was borrowed initially. When you obtain this version of a VA construction loan, you’re only required to do paperwork on one loan and pay one closing cost.
Construction-Only or Two-Time Close Loan
This loan covers the construction of the home. However, when the project is finalized, you’re required to take out a second loan to cover the first. This means you have to deal with two closing costs and two qualification processes.
VA Construction Loan Requirements
There are several important requirements regarding eligibility for a VA construction loan. The first, and most important requirement, is that you must work with a VA-approved lender.
Additional eligibility requirements are as follows:
Certificate of Eligibility
You need a Certificate of Eligibility (COE) obtained from the VA. You’ll need to file for this certificate online or turn in Form 26-1880 at your local VA headquarters.
The VA designates no minimum credit requirements. However, most financial institutions have a minimum score to qualify. Normally financial institutions look for at least a 680 score for loan approval….however PRMG has more flexible requirements and will allow borrowers to have as low as a 620 credit score for a VA construction loan!
Debt-to-Income Ratio (DTI)
Your DTI must be 41% or lower to get a majority of VA loans. However, certain cases allow this requirement to be waived. One of these cases includes earning a tax-free income. Additionally, the bank will use a formula that incorporates the home’s location, your household size, and your ability to handle loan repayment with your residual income. Residual income is what is left over after you satisfy other monthly bills and the cost to maintain your home.
You may not have to pay mortgage insurance for a VA loan, but you will be required to pay a funding fee. This funding fee is contingent on the down payment amount and whether you’ve used a VA loan in the past. Many times disabled veterans are able to have the funding fee waived.
You’ll be required to complete construction plans, including floor plans and the materials needed to complete the construction. You’ll also need an appraisal to demonstrate the value of the home. A VA property certification is also required before you can continue moving ahead with construction. PRMG will coordinate these items with yourself and your designated contractor that will build the home.
Remember when we said you’ll need to deal with a VA-approved lender in the beginning? You’ll also need to find a VA-approved home builder. They must be registered with the VA already or move forward with registration and successfully be approved. Again, PRMG will coordinate this approval process with your builder.
Your builder must provide you with a one-year warranty at the minimum or a 10-year protection plan with insurance.
Assuming you meet all of these requirements and you’re approved for the construction loan,the construction project will be under intense scrutiny to make sure that you as the veteran are protected from any unscrupulous characters. A VA inspector will monitor the project during every phase. When phases of construction begin to wind down, your inspector will examine the work to approve subsequent draws to satisfy contractor payment.
What Options Exist for Building
VA construction loans are only allowed for use in building a single-family home. These loans aren’t made to construct homes for multiple families or any other construction project.
Implementing certain customizations to the project is legal, but you should avoid thinking too far outside of the box. The design should have an overall element of normality and somewhat match the sizes and styles of surrounding homes.
This is also true of the lot size and accompanying property. Your lot size should be similar to the neighbors and not include any massive plots of land or extravagant spreads.
VA Construction Loan Vs. Construction Loan: Is There a Difference?
A regular construction loan actually has more specific rules and regulations and stricter underwriting requirements. You’ll also be required to make a decent-sized down payment to receive a normal construction loan approval.
There’s normally no need for a down payment when it comes to a VA construction loan. You’ll also enjoy more flexibility when it comes to credit prerequisites. Many veterans find it easier to obtain a VA construction loan than a standard construction loan.
However, the increased credit flexibility and lack of down payment don’t come without a price. You’ll be under the microscope of VA inspectors in a way that you don’t experience with a normal construction loan. Additionally, you’ll have strict limitations when it comes to the size of the property and the type of home you can build. The project completion date may be substantially longer because of how often the VA inspector shows up to analyze the scene.
What Are VA Construction Loan Rates?
Construction loan rates are normally higher than a standard mortgage that you would obtain for purchasing a home without building one. This is because a mortgage is a type of secured loan that includes the home as collateral.
If you fail to make your payments, the lender will make up the losses by selling the home. However, when it comes to construction loans, this option doesn’t exist because the home isn’t complete. Lenders assume much higher risks, and because of these risks, rates are often inflated.
Keep in mind that lenders formulate their own rates for VA construction loans. The VA has no voice when it comes to these rates. When you see an advertised rate from a lender, this has the potential to remain in a constant state of flux, even changing several times daily.
VA Construction Loans Benefits and Pitfalls
Just like any other financial arrangement, a VA construction loan has specific pros and cons.
- You may not be required to come up with a down payment
- You won’t be bogged down with paying mortgage insurance
- Closing costs may be worked into the final cost of the loan and spread out
- Credit and income requirements are less demanding
- The funding fee may be waived in certain cases, including situations when individuals have service-related disabilities
- The builder and the lender must both be approved by the VA
- Appraisals can take longer
- Closing costs are higher because of inspection fees and additional expenses
How Difficult Is It to Obtain a VA Construction Loan?
In general, if you qualify for a standard VA purchase or refinance loan, PRMG is able to qualify you for a VA construction loan.As previously mentioned, you will need a minimum of a 620 credit score, and have income and assets sufficient to qualify for the loan.
Remember, VA construction loans don’t require a down payment, and the requirements are more relaxed, however VA construction loans have strict land and property rules.
Where Can You Obtain a VA Construction Loan?
It’s important to note that most lenders that offer VA loans do not offer VA construction loans. Many lenders may list VA home loans as options, but not a VA loan for constructing a home.
PRMG offers borrower VA One Time Close construction loans. The great thing about PRMG’s product is that you only have to close one time….instead of closing twice and paying two sets of closing costs.
It is important to work with someone like PRMGthat has an immense amount of experience with VA construction loans because of the rules and requirements involved with this process. We use our experience and history in the construction and mortgage lending environment to help you get in the best loan program available for you as a veteran. We love helping veterans build their dream home!!
VA Construction Loan Alternatives
If you’re having challenges obtaining funding for a VA construction loan, you have more options for borrowing. Your first option is to obtain a traditional construction loan while the build takes place and then get a VA loan to finance the home.
Your second option is to get a government-backed construction loan, but not the VA type. Possible options include an FHA construction loan or a USDA construction loan. Remember that these loans will have different rules and requirements and stricter underwriting in comparison to a VA construction loan.
Is a VA Construction Loan Right for Me?
In the end, you’re the only person who can decide whether a VA construction loan is right for you. It’s important to analyze your situation as a whole when making your decision.
If you believe that you’ll have difficulty coming up with a down payment, and this is a deciding factor in obtaining funding for a home, a VA construction loan could be appropriate for this sole purpose. Remember that the rules surrounding these loans will require sacrifices.
For example, you won’t have full creative control over the final product. If you, or you and your spouse, have a specific design in mind for the construction of your home, the rules regarding a VA construction loan could throw a wrench in your spokes. Understandably, these are sacrifices that some people just aren’t willing to make. Purchasing or building a home is a huge life event, and it’s important that you’re able to emerge satisfied when the project is complete.
In the end, the final decision boils down to what dynamics are most important to you. If creative control is the most important element in the process, you might want to find alternative ways to fund the project.
However, if your motivations are all financial-related, a VA construction loan may award you with advantages you wouldn’t have otherwise. In the end, the most important thing is to make sure you achieve your goals, and normally this requires navigating roadblocks.
When it comes to a house, your roadblocks are either money-related or design-related. Figure out what’s holding you back. You can then decide which option gives you the best opportunity to overcome these hurdles.
Feel free to contact one of our construction lending experts to see how we can qualify you to build your dream home!!