02 Nov Can Veterans Build a New Home With a VA Construction Loan?
Have you ever thought about building a home for yourself? Even if you have, it can be hard to know how to start. There is a lot of information that needs to be assessed and understood before the process even begins.
One of these key points is your ability to receive a loan from the Department of Veterans Affairs (VA). Through this article we will discuss exactly what veterans need in order to qualify for one of these VA loans as well as some common questions regarding VA construction loans.
We hope that by reading this blog post on our website, you will find all the resources necessary in order to build your dream home!
Take a look at our VA loan calculator before buying a home!
What Is a VA Construction Loan?
VA construction loans are generally short-term loans used to finance the construction of a Veteran’s home. They can also be used to fund the building of a first home. A VA loan is used to purchase a home by borrowing the amount needed to cover the cost of the house and paying it back with interest over a set period. As you complete each construction process step, you draw funds from the VA construction loan to pay for it.
The VA offers several advantages with its construction loans. A VA construction loan only covers the portions of your home that have been completed rather than receiving one upfront payment. Another advantage is that no down payment is required. You won’t need private mortgage insurance (PMI) if you don’t make a down payment.
The VA offers many different loan types. Check out our article to learn more!
Benefits of a VA Construction Loan
Military members who are currently serving in the military and Veterans can take advantage of VA construction loans. There are many advantages to VA construction loans, including:
- There is no down payment
- Loans with better terms and interest rates than conventional loans
- Mortgages with lower closing costs
- Mortgage insurance is not required
The VA construction loan is available to service members and veterans with a credit score of as low as 640, and their debt level can be higher than that of a conventional construction loan.
Cons of a VA Construction Loan
VA construction loans have the following cons.
- VA-approved builders and lenders are required
- Appraisals can sometimes take longer than expected
- Financing fees and other closing costs can drive up closing costs
- Fees are a potential cost barrier to funding
- The interest rate on construction loans is usually higher
- Finding a lender can be difficult
Learn more about VA loan assumption.
Who Qualifies for a VA Construction Loan?
Additionally, a VA loan can be used to fund the construction of your own home as a construction or renovation loan if you are a veteran or member of the armed services.
Alternatively, you can use the loan to buy an existing home and modify it to suit your needs. You must meet several requirements to qualify for a VA construction loan, the first being working with a VA construction loan lenders.
A licensed, insured, and VA-registered contractor must be contacted before you can apply for a VA new construction loan. Builders are generally on a list or are required to register with the VA. (Usually, you cannot be considered the builder.)
Wondering how much house you can buy without a jumbo loan? Check out our article on the VA loan limits!
VA Construction Loan Process
In general, the application process for a VA construction loan is as follows:
Confirm Eligibility and Entitlement for a VA Loan
To be eligible for a VA construction loan, your first step is to obtain your Certificate of Eligibility (COE), which proves that you have completed the minimum amount of service as stipulated by the VA for your loan.
By using the VA eBenefits Portal, you can apply for your COE online. You must have your DD214 discharge papers on hand if you are a veteran. The statement of service can be obtained from your personnel officer if you are a currently serving member of the armed forces.
Find a Lender and Get Approved
VA loans aren’t directly issued by the VA but by banks, credit unions, or other lenders who offer VA loans. When finding a lender that will provide a VA construction loan, keep in mind that it can be tricky, even if the lender provides VA purchase loans.
Getting preapproved for the loan is essential if you’ve been able to locate a lender. Here are the documents you’ll need:
- Certificate of Eligibility
- Returns of federal taxes (two years)
- Statements of bank accounts
- Investing and retirement account statements
- Photo ID, such as a driver’s license
- Detailed land documents, including a land survey and settlement statement (if it is already owned)
- If you haven’t yet purchased the land, sign a purchase agreement
- An agreement between the builder and the client
Work With a Registered Builder
VA construction loans require that you work with a licensed and insured builder registered with the VA. In most cases, you cannot be considered the builder. Your lender may have a list of approved builders or may require that your builder goes through the VA’s registration procedures.
You can search for VA-registered builders through the Veterans Information Portal. The Veterans Information Portal provides a list of VA registered builders.
The VA Builder ID number is obtained when the builder submits the following items to the local VA Regional Loan Center. If the builder isn’t registered with the VA, the builder should submit the following items to the VA:
- Information and certifications about builders
- Veterans Affairs Form 26-421
- Veterans Affairs Form 8791
Submit Construction Plans and Specs
The builder must be registered with your lender before you can submit the construction plans. Build your home with paperwork that describes your builder, the site, and the building materials.
To qualify for a VA construction loan, you must have information regarding the land – the deed, if you already own the property, or the purchase contract for the property.
Get a Home Appraisal
The VA will also require that you get an appraisal of the home, which will be based on your grand and excessive way, or if the design of your home is unusual, this might cause your appraisal to come in lower than what is required to obtain a loan.
Close the Loan
A VA construction loan can take as long as 45 to 60 days to process due to the additional paperwork required to get approval. You might want to let the seller know what your expected time frame is if you’re buying land.
Those who are responsible for funding fees must pay them within 15 days after the loan closes. Based on the timeline of the project, the loan funds will be disbursed after it closes. A builder may receive an advance of 10 percent for each lot that you purchase at closing. A loan balance is deposited in a draw or escrow account to be withdrawn during construction in installments.
Get VA Property Certification
Once the building is completed, you will need a final VA inspection to ensure that the original plans constructed the home. Once this inspection is complete, the project is complete. When this has been done, the loan will become a permanent VA loan.
What You Should Know About VA Construction Loan Rates
The interest rates on a VA construction loan might be higher than those on a conventional loan. There is usually a 1% to 2% rate increase between the interest rate on a construction loan and the standard interest rate on a mortgage.
As a result, VA’s construction loans have traditionally had little guidance about requirements and guidelines, which in turn causes widespread uncertainty and a lack of familiarity with lenders’ policies and requirements.
There are no finished properties to serve as collateral in contrast to a mortgage for an existing home. The interest rate will be a bit higher this time – usually 1 percent or higher, although rates can vary from quote to quote.
When to Convert the Construction Loan to a VA Home Loan
Veterans United Home Loans does not provide construction loans for building new homes. Construction loans from builders or local lenders are more common, which can then be converted to permanent VA loans.
After the construction of a home, borrowers who qualify can convert that VA construction loan into a permanent VA home loan once the home is finished.
Read more about the additional VA loan options besides a new construction loan.
Is a VA Construction Loan Right for You?
VA Construction Loans are the right choice for Veterans who want to build their dream home from the ground up and want their home according to their specifications and needs. It offers many benefits to veterans, such as the ability to save on closing costs, the reassurance that only one underwriting process is necessary, and the security of deferring payments until after construction is complete.