With 38,780 guaranteed loans, the total amount of VA loans in May 2024 was $14.76 billion. A VA construction loan is a financing option for veterans, active-duty service members, and surviving spouses.
The VA construction loan covers everything from land purchases and building to the permanent mortgage for the finished residence. Unlike traditional routes, VA loans involve only one underwriting process, one appraisal, and a single closing.
So, if you’re a veteran looking to construct your new home, apply for a preapproval today and take a step ahead to acquire homeownership.
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What Is a VA Construction Loan?
A VA construction loan is a type of mortgage for veterans and active duty service members backed by the U.S. Department of Veterans Affairs. In a regular mortgage, you get a lump sum amount but in VA construction loans, you receive the funds in stages as construction progresses.
This guarantees that the builder is paid for completed work and that you are not charged for unbuilt work. Additionally, lenders for VA construction loans demand a FICO credit score between 620 and 640.
Types of VA Construction Loans
There are two types of VA construction loans to build a house for veterans:
Construction to Permanent or One-Time
It is a VA one-time close construction loan for the entire project. Once the construction is complete, the loan seamlessly converts into a regular mortgage. After that, you start making repayments as you would with any other home loan.
Two-Time Close Loan
It involves two separate loans. The first loan covers the construction costs of building your home and it gets closed before construction begins. The second option is to convert this initial loan into a permanent VA loan by using the transition to a permanent VA loan process.
Who Are Eligible for VA Loans?
To qualify for a VA construction loan, you need to look over the eligibility requirements before applying for the loan:
- Credit Score: A VA loan doesn’t have a minimum credit score requirement. VA construction loan lenders may follow their guidelines and may ask for a credit score of 620 or above.
- Certificate of Eligibility: A certificate of eligibility is a military-issued document required to showcase that you meet the minimum service requirements. And for that, you need to request it from the VA.
- Debt-to Income-Ratio: A debt-to-income ratio is dividing the sum of your monthly debts by your gross monthly income. For the VA construction loan, a DTI of 41% or less is required.
- VA Funding Fee: VA loans do not charge any mortgage insurance for minimal down payments. They will charge a one-time funding fee of around 1.25% to 3.3%.
- Property Requirements: VA prioritizes safety and value in veteran housing. They achieve this by requiring inspections to ensure homes meet building standards and appraisals to confirm the property value supports the loan amount.
- Closing Costs: To prevent lenders from charging outrageous fees, VA loans have a cap on closing costs. It’s equal to 1% of the loan amount.
How to Apply for a VA New Construction Loan?
To apply for a construction loan, you need to find VA construction loan lenders to determine how much loan amount you qualify for:
- Check Eligibility: You need to first confirm your eligibility for a VA construction loan. It usually involves COE document verified by veterans.
- Get Pre-Approved: A VA-approved lender will assess your finances and provide a pre-approval letter outlining your borrowing capacity.
- Find a VA Builder: Search for reputable builders certified by the veterans to ensure they meet the construction quality standards.
- Appraisal Time: An approved VA appraiser will inspect the land and proposed plans to determine the upcoming value of the completed home.
- Loan Application & Approval: Submit a formal application with your lender, including all the required documents & appraisal report.
- Loan Disbursement: After applying the lender will disburse funds to the builder in stages. It will be based on the construction progress and completion of inspections.
- Closing the Loan: Finally, close the permanent loan and move into your brand new VA-backed home.
Fees for VA Construction Loans
When it comes to VA home loans to build a house, there are construction loan fees you need to pay:
- Lender Fee: Construction lenders charge a fee of up to 2% of the loan amount for their services. This fee is based on the progress of construction.
- VA Funding Fee: Unless exempt, you’ll pay a VA funding fee at closing. For first-time VA loan borrowers, the rate is 2.30%, and for repeat borrowers, it’s 3.60%.
Pros & Cons of VA Construction Loan
Some of the following pros and cons of a VA construction mortgage are:
Pros
- No Down Payment: In a VA loan there is no down payment required for a construction loan. You can save your savings for other expenses.
- Credit Requirements: VA loans typically have more relaxed credit score requirements between 620-640 as compared to traditional construction loans.
- No Private Mortgage Insurance (PMI): VA construction loans eliminate the need for PMI, potentially saving you money each month, unlike conventional loans.
Cons
- Limited Lender and Builder Options: Some limited VA-approved lenders can help homeowners build their homes.
- More Demanding Approval Process: In this VA construction loan, there is additional paperwork and inspections as compared to a standard mortgage.
- Potentially Increased Interest Rates: VA construction loans may have higher interest rates than traditional construction loans. The interest rates for this loan typically run at least 1% higher than standard mortgage rates.
Bottom Line
Veterans can construct the homes of their dreams with substantial financial benefits when they use a VA construction loan. With these loans, there is no need for private mortgage insurance because they can have low or no down payments and competitive interest rates.
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Frequently Asked Questions
Are VA construction loans right for me?
Yes, a VA construction loan can be a great option if you are a veteran eligible for a VA loan and want to build a house. It also offers low down payment options and avoids PMI, but requires working with VA-approved lenders and builders.
What procedures must be followed to apply for a VA construction loan?
A typical process for a VA builder involves determining eligibility, obtaining preapproval, completing plans, appraisal, loan application, construction with inspections, loan disbursement, and closing on the permanent loan.
Are there any downsides to consider with a VA construction loan?
Compared to conventional mortgages, VA construction loans may have somewhat higher interest rates and a more involved approval process, despite their benefits.
