If you are a veteran ready to build your own home, a VA construction loan might just be the financial vehicle to help you do it. There are many reasons why you may want to build your own custom home instead of deciding to buy one that is already finished. If that is the case, you will want to know everything you can about VA construction loans.
A VA construction loan is a short-term option designed specifically to provide you with the funds that you need to build a home. While you will not receive all of the money in one lump sum, you will receive it in installments as your home is completed. It is a great way to manage your budget.
Veterans deserve to have access to adequate and beneficial lending options. That is why the VA program has been developed. The VA construction loan is available to help you build the home of your dreams in a way that can fit within your financial means. Continue reading to learn more about how this type of loan can potentially be of benefit to you.
Can a VA Loan Be Used for New Construction?
While a VA loan can only be used to purchase a primary residence that has already been constructed, eligible veterans may qualify for a construction loan. This will provide the money that is needed to buy land and then pay for the construction of a new home. Lenders such as ADPI’s in-house lending team offer this service.
It is important to understand that a VA construction loan can only be used to pay for any part of your home that is actually completed. In other words, you will not receive all of the money needed for the construction of the home upfront. For example, if the home is budgeted to cost $250,000 to build, you will only receive the money as the home is completed in stages.
One of the significant aspects of a VA construction loan is that the money can be used to pay for the land needed to construct the home. This is a way for veterans to build their dream home, even if they do not currently have any land on which to do so.
When applying for a VA loan that is to be used for a new home construction project, these three things are helpful to keep in mind:
- No down payment is required.
- Qualified veterans are not required to purchase private mortgage insurance (PMI) even if they choose not to make a down payment.
- Many applicants will find that they are exempt from having to pay any type of VA funding fee.
In other words, qualified applicants will find that a VA construction loan has lower fees than most other types of home loans. In addition, a loan can be achieved without having to show a great deal of money in the bank.
What are the Qualifications for a VA Construction Loan?
Not just anyone qualifies for a VA construction loan. In addition, there are specific requirements that must be met. Those are best summarized as follows:
- You must be either an eligible service member or a veteran. A licensed and insured builder must carry out the construction.
- You must be prepared to detail what type of materials will be used to build the house.
- The home must receive a comprehensive appraisal.
Because of the detailed qualifications that must be met before you can receive a VA construction loan, it does take longer to receive official approval than other types of home loans. There is a lot of documentation and signatures are required before an application will even be accepted for consideration. This makes a VA construction loan more time consuming than a regular VA loan as well.
What is the Process for Obtaining a VA Construction Loan?
It can be quite a complicated process to apply for and get approved for a VA construction loan. This is further compounded by the fact that so few lenders offer this type of loan. Generally speaking, the following steps are required before you can get formal approval for a VA construction loan.
Obtain a Certificate of Eligibility
VA construction loans are only available to certain people who fall into a specific category. Namely, the applicant must be either a service member on active duty or a veteran. In order to confirm this to the lender, you will first need to get a Certificate of Eligibility (COE). This will need to be provided to the lender before they will process the application.
The Certificate of Eligibility is meant to confirm that you meet the requirements set forth by the VA construction loan program. You will be eligible to receive the COE if you have accumulated a minimum of 90 days of active service or served at least six years in the service with an honorable discharge at the end.
Receive Preapproval for Your Construction Loan
As soon as you have the Certificate of Eligibility in hand, you are able to apply for a VA construction loan preapproval. This can be done through any bank, credit union, or lender that services VA construction loans. Keep in mind that not every institution offering VA loans will also make VA construction loans available. You will have to do your research first.
The preapproval stage is an essential part of this process. To begin with, this will give you an indication of how much land and what type of house you can actually build. The preapproval letter that is generated will also indicate to your builder that you are serious and have the funds to make it worth their time to work out a detailed estimate.
Locate a Reputable Builder That is Registered with the VA
The VA will require that you use a builder that is licensed and insured in your state. In addition, the builder must already have been registered with the VA. If you do not know where to start your search, you might want to look at the Veterans Information Portal. This contains a detailed listing of VA registered builders by state.
To be clear, the builder that you use for a VA construction loan must be registered specifically with the VA. The builder will also need to submit the plans for the house that you want to have built, along with any materials that they plan on using in the construction. These plans will need to be submitted before the loan is formally approved and any money distributed.
Receive an Appraisal on the Property
The lender is going to require an appraisal of the property. This is going to include the land that the home is being built on, along with the plans that the builder draws up. Keep in mind that the VA must approve the appraiser that you use. You will also want to choose a home appraiser familiar with the VA construction loan program guidelines.
Officially Close on the VA Home Construction Loan
If everything has been approved to this point, that means that your building plans have been accepted as well. You will now be ready to close on your VA construction loan. However, you do not want to start building just yet. It is important to know that the entire process to this point can take as much as 60 days to complete.
You will also need to bear in mind that this is not like a typical mortgage. You will not receive all the money at one time upon closing. Instead, you will get the money in installments according to the timeline you and your builder agreed upon. The rest of the money sits in an escrow account until the lender approves it disbursement based on the project’s progress.
Pass a VA Inspection on the Home
Closing on your VA construction loan puts you on the path to getting the cash you need to pay for the new home build with installments. Once the house is finished, you will need to have an official VA inspection in order to finalize the loan process. As soon as your home passes the inspection, you will have a certified and permanent VA loan.
Is It Easy to Qualify for a VA Construction Loan?
While it is easy to qualify for a VA construction loan, the process of obtaining one can be rather difficult and time consuming. Since you are either a veteran or active service member or you’re not, that part of the qualification is easy. However, formal approval for the loan will take some work.
Keep in mind that just because you are a veteran or active service member does not mean you will automatically get a VA construction loan. Other considerations must be taken into account as well. Those include:
- Your current creditworthiness
- Your current debt
- Your current income
- How much money you have saved up
- The total amount you need to borrow to build the house
Keep in mind that the VA is not going to approve a construction loan if you cannot get approved for enough money to complete the build. It does not do the lender any good to have a half-finished home on their hands, and then you run out of cash. This is why part of the approval process requires such detailed building plans, including a budget, before you can even apply.
What Type of House Can be Built with a VA Construction Loan?
You will need to check with your lender to find out what types of homes they will permit to be built with a VA construction loan. Since every lender has its own specifications, it is also wise to check with a local VA registered builder. These are the professionals who know what is allowed and what is not.
Keep in mind that certain types of homes are generally not permitted with a VA construction loan. Examples of this include mobile homes and manufactured houses. These are not considered stable dwellings, so they do not typically qualify under the VA construction loan program.
What is the Interest Rate for a VA Construction Loan?
It is difficult to pinpoint the exact interest rate that you will get with a VA construction loan. This is because the Department of Veteran Affairs does not actually stipulate the interest rate that is to be offered by lenders for VA homes. The interest rate will typically depend on your credit history.
Since the interest rate on your loan is extremely important in terms of the cost you will incur to borrow the money to build your home; this is where you want to spend some time doing your research. If you have time, work to short up your credit rating. Get your credit score as high as it can be, pay of some debts, and contact multiple lenders to get the best offer.
When Will Mortgage Payments Start on a VA Construction Loan?
Unlike other types of loans, repayment on a VA construction loan begins once the construction is finished and the home has passed the VA inspection. You will also need to repay the loan within the term that you agreed to with your lender. All other terms will depend on the lender.
Keep in mind that money for a VA construction loan is disbursed in installments throughout the project. You do not start paying that money back until the home is finished. That means if the home takes 18 months to complete, you will not be expected to start paying back any of that money until that final VA inspection has been completed.
While there are many types of loans on the market that will help you build your home, the VA construction loan program has favorable terms for a specific category of individuals. If you qualify, this is a loan that you will want to consider. If you compare it to other available types, you will probably find that it is a much less expensive way to borrow money overall.
Wrap-Up
Now that you know more about VA construction loans, contact ADPI’s in-house lending team to learn more about how you can get started. If you think that you do not have the money to build your own home, this is a program that might help you get around the obstacles you have been facing. Start envisioning life in your new home.
Sources:
https://www.veteransunited.com/valoans/va-construction-loans/
https://themortgagereports.com/75184/va-construction-loan-guide
https://www.bankrate.com/mortgages/va-construction-loan-process/
