Are you frustrated with the inventory of homes currently available on the market? Are you wishing you could put your custom touch instead of buying someone else’s style? This is where the VA Construction Loan can help!
The VA Construction Loan gives borrowers the option to build their ideal home to their specifications—rather than buying one available for resale. In certain situations, new construction may be a comparable price or cheaper than purchasing an already-built home.
One of the things that makes the VA Construction Loan such an attractive option is that you may be able to build a multi-unit residence. VA regulations allow up to four units--and this includes building! But, take note that you must occupy one of the units in order for this to be an option.
Previously, the VA has used what’s called “two-close” construction loans. This type of loan has a loan application for both phases, two closing dates, etc. But this became overly complicated, so another option was created for borrowers: the “one-close VA Construction Loan”
As the name suggests, this loan type only requires one mortgage application, one closing date, and a one-time credit application. This reduces complications, but the borrower is required to get builder permits to submit before final application approval. The good news for borrowers is that mortgage payments are not required until the work in completed – thus reducing risk and financial hardship for the borrower.
The application process for a VA construction loan is more complicated than your standard VA Loan. Even finding a VA Construction Loan lender can be dicey. Lenders for VA Construction Loans can be difficult to find. Not all “VA Lenders” do them, and the upfront costs of a construction loan tend to be riskier. Some loans may even require a down payment, so make sure you do your research. You can also search for lenders here (link to ADPI lenders).
With the VA Construction Loan, it’s common for a lender to “float” interest rates during the construction process. This allows the interest rate to adjust downwards and it also provides a maximum limit on how much the interest rate can increase.
If you’re wondering about how the VA Funding Fee works with new construction, it is still required unless you are classified as “exempt” by the Department of Veteran’s Affairs.
Similar to other types of VA loans, borrowers are subject to the usual VA eligibility requirements. It’s important to have that all squared away to prevent any delays. The new construction home must also meet the VA minimum property requirements.
If you’re looking to do the work yourself, I’m afraid you’re out of luck! VA regulations state that the borrower cannot do any work on the home during the construction process. At the start of the process, borrowers must choose a builder for the construction. The selected builder must have a valid VA builder ID (or be willing to submit the documentation to become one) and must also provide a one-year warranty on the construction to the chosen lender. During construction, the VA also requires that all disbursements to the builder are to be approved by the borrower. This can ensure that the borrower is happy with the builder’s progress.
It’s important to know your style and specifications when you begin. Plans and specifications are required to be submitted by the borrower/builder during the initial application. Also, during the construction process – the VA will be doing periodic inspections to ensure that the construction is meeting the minimum property requirements.
During the design phase, it can be tempting to over-improve a new build, but it’s crucial to keep the improvements comparable to homes in the area. If you over-improve and the VA appraisal comes in lower than the upgraded purchase price, you will be responsible for the difference – resulting in a down payment that would come out of your pocket.
For the land purchase, the VA does not allow vacant land purchases to build on later, but they do allow the land purchase to be wrapped into the VA Construction Loan. It's also important to keep in mind the location of where you will be building. A good location is vital when you may have to either sell or use the home as a rental property in a few years.
As mentioned before, it may be difficult to find lenders that offer the VA Construction Loan. Because of this, it may be worth looking for another option. Do your research and compare lenders/builders because some builders offer financing programs and incentives for veterans.
It's essential to also do your research to confirm that the numbers for building make sense. You have to determine whether or not you will be able to break even or better with your investment.
There may be a lot of considerations in choosing a VA Construction Loan, but it may be a great option for someone looking to build a home. Make sure to talk to your lender of choice to see if it's the right loan for you.