Many veterans use their VA home loan benefits to purchase a home, but VA loan options also include the ability to apply for a VA construction loan, to have a house built from the ground up. The VA construction loan option is an important one for those who would rather not purchase an existing construction home. One of the acceptable uses of VA loans is that they can be used to build a home on a piece of land. Qualified military borrowers can use VA entitlement toward a new construction mortgage.
What Is The VA Construction Loan?
VA construction loans allow the borrower to borrow money for both the mortgage phase of the loan and the construction phase where the house is built from the foundation up.
There are “two close” construction loans, which feature a loan application for both phases, two closing dates, etc. These loans can be more complex because of the two closing dates, but this type of construction loan has been typical in decades past.
Another type of VA construction loan, the VA One-Time Close mortgage, has a single application and closing date, which avoids requiring the borrower to credit-qualify twice.
One time close mortgages feature a single closing date and the borrower will be required to get builder permits and other required paperwork approved for the construction phase as a condition of final loan approval.
What Can I Build With A VA Construction Loan?
Lender standards are extremely important for this type of VA home loan. Not all lenders will issue loans for all property types, and construction loans are no exception. Some lenders won’t approve VA construction loans for mobile homes, modular homes, or manufactured housing.
These lenders may ONLY approve “stick-built” homes, which is the definition of a typical house built from the ground up.
Some VA lenders may not approve VA construction loans for multi-unit properties, but others might. You will need to discuss your plans for the home with the loan officer to see what may be possible.
Who Can Build My Home With A VA Construction Loan?
VA loan rules state that the source of the construction work must be a VA-approved builder registered in the VA system. Borrowers should ask their loan officers about any additional restrictions or requirements that may apply in that housing market or that financial institution. Borrowers may or may not be permitted to participate in the construction process, but you will need to see whether lender standards permit it.
Is Escrow Required With A VA Construction Loan?
VA loan rules require “formal escrows” when dealing with a construction loan. State law and lender standards may also apply.
What About Interest Rates?
The Department of Veterans Affairs does not set or regulate interest rates on VA home loans. The borrower and lender will negotiate the rates and it’s common to see “ceiling-floor” options where the lender will “float” the interest rate for the duration of the construction phase (or a different length of time depending on the lender and other factors).
Such agreements are generally required to have a maximum limit to the interest rate, plus a “floor” that allows a downward adjustment to the interest rate. Interest rate issues depend greatly on the borrower’s credit qualifications.
Borrowers are required to credit qualify for all VA home loans, and those credit qualifications will determine your ability to access the most competitive interest rates.
Are Credit Qualifications Higher With VA Construction Loans?
The simplest answer is, “It depends on the lender.” In the past, VA home loan rules in the VA Lenders’ Handbook have not specified a minimum FICO score for loan approval, making lender standards in this area quite important.
You will need to know what the lender’s FICO score requirements are in general and how the more complex nature of the VA construction loan might affect those requirements.
Do VA Construction Loans Require Payment Of The VA Loan Funding Fee?
Unless a borrower is exempt from paying the VA loan funding fee, payment of the funding fee is required for VA Construction Loans the same as with any other type of home loan.
Borrowers who may be eligible for an exemption from paying the VA loan funding fee (because they receive or are eligible to receive VA compensation for service-connected conditions) should discuss this with a loan officer.
If you have not yet been officially declared exempt from the VA loan funding fee at closing time, you may be required to pay the funding fee and later apply for a refund of the fee once your exempt status is made official.
When Do My Mortgage Payments Begin On A VA Construction Mortgage?
VA loan rules state that payments are not due on VA construction loans until the work is completed. The initial payment could be delayed as long as one year, but the loan must be paid back within the “remaining term”. If there are 29 years left on the mortgage when payments begin, the loan must be adjusted to be fully paid off within that time frame.
Depending on the lender, that may require a balloon payment or the lender may be interested in adjusting the monthly mortgage payment amount to avoid a balloon payment at the end of the loan term. You will need to discuss this with your lender as VA loan rules, state law, and lender requirements will all be a factor in this area.
Are Land Acquisition Costs Able To Be Included In The Loan Amount?
VA loan rules state that the expense of the land may be included in the loan amount, but how that expense is calculated depends on certain factors as described below. Land costs can be included, calculated as follows:
- Cost of the lot if acquired within one year from VA loan closing, or
- Value of the lot if acquired more than one year from VA closing, or
- Value of the lot if gifted to the Veteran and there are no liens on the lot, or
- Lots gifted less than one year from VA closing are limited to lot lien(s) if any
Documentation is required for any/all of the above.
Things to Know about VA Construction Loan
- The VA requires a licensed, insured builder that is willing to submit documentation to become an approved builder. Owner/builders are not allowed.
- The borrower and builder must submit a complete set of plans and specs at application.
- The builder is responsible for construction closing costs but these costs can be incorporated into the builder/borrower agreement.
- The process takes about 45 – 60 days.
- VA construction loans require that the loan is closed before construction begins.
Who Can Issue A VA Construction Loan?
Any VA-approved participating home loan lender can issue a VA construction loan. As with all VA mortgages, VA loan rules are not the only regulations which must be followed. State law, lender standards, building codes, and other requirements all may apply. Not all VA lenders offer all VA loan products.
Joe Wallace is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News