VA Construction Loan Guide | Requirements and process 2021
Can I build a house without a down payment?
Are you looking to build a new home from scratch? Are you an active duty member or a veteran?
If this is the case, you may be eligible for a VA construction loan, sometimes called a permanent VA construction loan.
This loan can finance everything from the purchase of the land and construction to a permanent mortgage for the finished residence. And, as with all VA mortgages, no down payment is required for eligible borrowers.
The trap? VA construction loan lenders can be difficult to find. So you may have to dig.
Learn more about what is required, how to qualify, and if a VA construction loan is right for you.
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What is a VA construction loan?
If you are an active duty member or veteran with an eligible service history – or a surviving spouse – you may be able to take advantage of a generous loan program provided by the United States Department of Veterans Affairs: the Construction Loan. GO.
For eligible borrowers, a VA construction loan can simplify the process of building your dream home.
âThe benefits of a VA construction loan include no down payment required, no minimum specified credit score, and no private mortgage insurance required on the VA permanent mortgage,â says Richie Duncan, senior loan officer at VA Nationwide.
And, the VA construction loan is flexible. Funding can be used for:
- The total cost of purchasing a piece of land, building a house on it, and financing the permanent mortgage on the residence once it is complete. With this option, there is only one subscription process, one valuation, one set of closing costs and one single close. This is known as a short term VA construction loan.
- The combined costs of buying land and building a house on it, after which your VA construction loan can be refinanced to another permanent VA mortgage. With this option, only one appraisal and one close is involved in the short term loan, but a separate underwriting process, appraisal, and closing costs are required for the permanent VA mortgage.
- Building the home on land you already own or finance separately, after which your VA construction loan can be refinanced into a separate permanent VA mortgage. As with option two, there is only one appraisal and closing for the VA construction loan, but a separate underwriting process, appraisal, fee, and closing is required for the permanent VA mortgage.
The only problem is that it is difficult to find VA construction lenders. If you can’t find a willing lender, you may need to consider other financing options.
Check your eligibility for the construction loan (April 20, 2021)
The VA Construction Loan Process
The VA construction loan process involves a series of steps, according to Julie Aragon, CEO and founder of Julie Aragon’s loan team:
- Your entitlement to VA benefits is verified by obtaining a Certificate of Eligibility (COE) and providing personal financial information to the lender. Prepare to collect and review copies of current credit reports, proof of income, current bank and investment account statements, and other financial documents the lender may request
- Find a lender who offers VA construction loans and get pre-approved. Note that the AV does not lend directly, so you will need to look for a private lender that offers this program.
- Choose an approved builder / general contractor who is properly licensed and approved by the VA and submit your house construction plans to the lender
- Have a property appraised
- Have the completed home inspected to VA standards and complete the closing process
- If your VA construction loan does not include a permanent mortgage component, you will need to refinance a VA home loan after the house is built.
“Note that for VA construction loans, the disbursement of funds to pay for the construction of the house is done in a series of installments, or ‘draws’, at certain milestones as construction progresses,” explains Aragon.
VA Construction Loan Requirements
Several rules apply to VA construction loans, including guidelines for the borrower, contractor and house under construction.
First of all, you need a decent credit score.
âAlthough the VA guidelines do not specify that borrowers have a minimum credit score or meet other financial criteria, most actual VA loan lenders will. To improve your chances of eligibility, aim for a minimum credit score between 620 and 640, ârecommends Aragon.
- Your debt ratio (DTI) must be less than 41%
- You must meet income requirements based on your family size
- You must not have been bankrupt in the past two years
- You need a stable income and a job; you need to be able to comfortably pay off your mortgage
Prepare to check for two years of income when applying for a VA construction loan.
For W-2 borrowers, gather the last 60 days of pay stubs, the last two years of W-2, and your last two annual tax returns. Independent borrowers should collect the last two years of complete personal and business income tax returns and all relevant tax schedules.
The house under construction must also meet certain requirements, including:
- The finished house must be occupied by the owner as the primary residence
- Types of homes eligible for construction include single-family homes, condominium units in approved projects or legal phases, and manufactured homes.
- Your total loan amount for the construction / permanent mortgage must not exceed $ 548,250 for most US counties in 2021
- The property must be located in a VA approved area and must not exceed maximum VA land limits, such as 10 acres
- The property must be inspected by a professional licensed by the AV
âKeep in mind that respective local regulations will dictate the ownership requirements for your VA construction loan,â notes Dan Holtz, co-founder and CEO of Sovereign Lending Group.
Lender / contractor requirements
And, finally, there are limits on which lender and contractor you can work with.
- You must choose a VA approved mortgage lender who participates in the VA construction loan program.
- The VA must approve your chosen contractors. âThey must have a license to practice, liability insurance and a minimum of two years of experience in building homes,â says Duncan.
- You must receive a new construction warranty from the builder
Finally, any funds remaining after construction is completed should be applied directly to your loan principal. You cannot receive cash back from this type of loan.
VA Construction Loan Lenders
Be aware: It can be difficult to find VA construction loans or lenders offering these loans.
âMany lenders offer standard VA home loans for those who buy existing homes. But less provide VA construction loans, âwarns Aragon.
âIn addition, the VA has traditionally provided limited advice regarding its construction loans, resulting in widespread uncertainty and unfamiliarity with lender guidelines and requirements,â she continues.
The good news is that you can visit the VA website to search for VA approved lenders. However, not all VA lenders offer VA construction loans. So be prepared to contact multiple companies until you find one that does.
VA Construction Loan Interest Rates
Another caveat is that you will likely pay a higher interest rate for a VA construction loan than for a standard VA mortgage.
âThis is because participating lenders consider home construction loans to be a bit riskier,â says Aragon.
Interest rates on construction loans are generally at least 1% higher than standard mortgage rates.
âUnlike a mortgage on an existing home, there is no finished property that serves as collateral. So expect the interest rate to be a bit higher, usually 1% higher or more, although the rate you are offered may vary. “
Another reason why your rate may be higher? âLong-term rate foreclosure is needed, which can result in a higher interest rate,â says Holtz.
Other construction financing options
If you don’t qualify for a VA construction loan or can’t find a participating lender, you’re not out of luck. There are other financing options that you can use for your new home.
For example, you could get a separate lot loan to buy the land and a traditional construction loan to pay for construction costs, followed by a separate VA home loan to finance the finished permanent residence.
âThe downside to this approach is that you’ll have a separate underwriting, appraisals, fences, and fees, and your non-VA construction loan will likely require a down payment,â Duncan says.
Or, you can apply for an FHA permanent construction loan, which combines the purchase of the land, construction costs, and permanent mortgage financing on the completed home into one loan with one appraisal and one closing. However, you will likely have to pay at least 3.5% to 10% and pay for private mortgage insurance up front and annually.
Alternatively, if you choose a USDA approved rural area to build a house, you may be eligible for a USDA Permanent Construction Loan. These also require no down payment and combine the purchase of the land, construction costs and the permanent mortgage loan into one loan product.
Finally, instead of building a new construction home, buyers might consider purchasing a repair home.
You could pay for the house and the rehab involved with a VA home improvement loan or another home improvement loan.
Check your eligibility for the construction loan (April 20, 2021)
The Bottom line: Check all your options
Whichever route you choose, be sure to explore all of your options.
Even though construction loans are a little harder to find, you still want to shop around and make sure you’re getting the best kind of loan and the best interest rate around.
Check your new rate (April 20, 2021)