Did you know that Veterans probably have the best loan available for buying a home? But, when it comes to building a home, VA loans do not seem to be mentioned as an option. So, finding someone who can combine VA loan benefits like borrowing up to 100% of appraised value along with a construction loan is rare. Although, a VA construction loan scenario is available with some lenders. Prior to contacting a lender, education on the subject should be a priority. So, let’s dig in!
Why Do Veterans Want a Custom Built Home?
Sometimes it is a personal choice, while others it is the local real estate market dictating the reasons. Generally, Veterans look to build for the following reasons…
- Lack of home inventory
- Custom build your own place
- Choosing your own land to build
VA Construction Loan Benefits
So, what makes a VA construction loan so important? First of all, it is the ability to build a home with as little as no down payment required. Yet, there are several factors that determine possible down payment or cash out of pocket. We will explain this shortly. Next, no monthly mortgage insurance in a homeowner’s mortgage payment makes VA construction loans very desirable. Basically, it makes the monthly mortgage payment lower than other comparable low down payment construction loans.
Then, there are lots of cool VA loan guideline advantages which are sprinkled throughout this article. Even if you decide to buy and not build, Veterans, active military, or a surviving spouse of a deceased Veteran should check out these tips as well. Just click on links as they interest you.
VA Loan Eligibility
In order to use a VA loan as one of the tools to build a new home, first the borrower must have VA eligibility. This is verified through a VA certificate of eligibility (COE) and it may be obtained a variety of ways. Maybe the easiest way is for your VA lender to make the request. If a Veteran, have your DD214 handy as it will be required. The COE tells lenders several key points such as eligibility used, prior VA loss (foreclosure or short sale), level of funding fee, or funding fee exemption.
Second VA Loan
Wait, did I just say “second VA loan”? Yes, and means two things. First of all, VA loan benefits may be used over and over as long as the eligibility has been freed up each time. When each VA loan is satisfied, the VA eligibility can be restored for subsequent use. Most know this already.
VA Bonus Entitlement
Although, many do not realize that it is possible to qualify for a second VA loan while another VA loan is still outstanding. That’s right! Multiple VA loans at once, which allows a Veteran to build a home using VA loan benefits again. This comes into play if VA eligibility is tied up on a primary residence turned rental or prior foreclosure / short sale.
If using bonus entitlement to build a home, the new loan amount must exceed $144,000 and as the loan amount increases, there may be equity requirements. The percentage of the appraised value is based on a formula which considers the entitlement available, price of the home, VA county loan limits, and the VA funding fee (if not exempt).
VA Construction Loan Guidelines Have Changed
Watch out for this key change if considering VA construction loans! When it comes to combining a construction loan with a VA loan, the required structure has changed for the worse. Without this knowledge up-front, it could be an unpleasant surprise at closing.
Effective with loan applications dated February 15, 2019, a VA loan that refinances a construction loan has a cap on the financed amount. Before, Veterans could borrow up to the full appraised value as determined by a VA appraiser. Then, add the required VA funding fee on top. This could be up to 3.3% of the loan amount. Yet, that has changed now! This new rule limits borrowers in that the total loan (including VA funding fee) must not exceed the appraised value. Therefore, if either the base loan amount or the fee exceed the value, the Veteran must bring the extra amount to closing.
VA Loan Refinance of Construction Loan
One of the most advantageous features of the VA construction loan combination is that the permanent VA loan is treated as a refinance. Even if the Veteran owns land already or buys the land through the construction loan closing, it is still structured as a refinance. Early in the process, once the builder contract is created and the land identified, a VA appraisal determines the value. Then, depending on the equity in the land and how long the land is owned, the VA loan may allow up to 100% of the appraised value.
Subject To Completion VA Appraisal
Another advantage of a VA loan is that the VA appraised value is good for up to 12 months. Conversely, most other appraisal types expire after 4 – 6 months. Those appraisals may put the borrower at a higher risk of potential reduction in value. Although, if a market declines, it could still affect the final value as determined by a VA appraiser. Usually, once the home is fully completed, the VA appraiser completes a final inspection.
The basic closing process goes like this:
- VA loan pre approval to determine borrower qualification
- Choose home plan and builder
- Choose land (unless already owned)
- Complete building contract (and contract to buy land if not owned already)
- VA appraisal is performed
- Submit file for permanent VA loan underwriting approval
- Submit file for construction loan approval
- Close on the construction loan
- As the home is being built, funds are drawn from the construction loan to pay the builder in stages
- Lock the VA loan interest rate
- VA appraisal final inspection
- Close on the VA permanent loan
- Move into the home!
Currently, we offer an in-house two time close construction and VA loan in NC, SC, VA, and MD. Contact us to build your dream home!