Veterans or active duty service members looking to build a home with a single loan program can apply for the VA one-time close construction loan. Veterans, Reservists, National Guard members, and other military service members can take maximum advantage of this made-easy loan process to finance the construction of a new home, purchase a lot, and get a permanent mortgage with one loan.
Interestingly, VA loan-eligible veterans can apply for a conventional or any other one-time close construction loan program and still enjoy the many benefits of VA construction loans.
Obtaining a VA OTC construction loan from approved VA lenders can make the construction loan process much easier for veterans. However, knowing what the one-time close loan entails and how to apply for it can boost your application. This guide will highlight the important things you need to know about obtaining VA one-time close construction loans.
What You Should Know About the VA One-Time Close Construction Loan
The VA one-time close construction loan, also called VA construction to permanent loan is a home loan program that allows fully eligible veterans and active duty service members to carry out the construction financing and mortgage of a home with single loan.
You can apply for VA one-time close construction loans whether you’re a current land owner or not. You don’t have to possess land before requesting the VA home loan. However, lot equity can be rolled into the loan if you own land. If there’s a lien on the land, you can have it paid off and rolled into the new construction loan.
When noting the construction to permanent loan, borrowers should understand that the permanent financing is provided before the construction phase, and the final permanent terms are established and modified when construction is complete. This implies that borrowers of VA OTC construction loans need not worry about qualifying for two home loans, closing dates, and other tied factors to a VA loan.
The Primary Elements of VA One-Time Close Construction Loans
The VA one-time construction loan process has a considerable advantage compared to other conforming OTC construction loans, such as the FHA OTC loans and the conventional or Fannie Mae OTC loans. Here are some primary elements of the VA construction loan you should know:
Offers Construction Financing, Lot Purchase, and Permanent Loan
The Department of Veterans Affairs backs VA OTC construction loans to help borrowers get VA-approved loans for home construction.
Single Closing Reduces Closing Costs and Paperwork
The time and cost incurred on a second closing are eliminated in the single closing type of loan. VA lenders get to carry out one appraisal and underwriting. Moreover, borrowers only need to qualify for a VA construction loan process once with a single set of closing costs.
Permanent Portion of the Loan Approved Before the Start of Construction
All required documentation needed to approve the loan is done at a go, and the permanent portion of the loan is disbursed to finance the construction of your dream home.
Construction Part Is Underwritten and Approved
The construction phase or procedure for your building is appraised before your VA construction loan is finally approved.
No Payments Due During Construction
For VA construction loans, there are no payments during construction. This helps out-of-pocket costs for veterans and other military personnel who might be paying the mortgage on an existing home.
No Re-Qualification Once Construction Is Complete
Once the closing on the loan is completed, borrowers cannot re-qualify for the same type of loan.
Financing Through VA
Veterans, eligible reservist, members of the National Guard, or their surviving spouses can get guaranteed financing of their VA construction loan through the Department of Veterans Affairs. In financing VA loans, the VA funding fee may also be financed into the loan.
However, some individuals, such as qualified surviving spouses or those receiving compensation for a service-connected disability, are excluded from paying the VA funding fee when taking VA construction loans.
Interest Rate Protection During Construction
The interest rate on the VA one-time close construction loans is slightly competitive, but then they are locked in before the building process and the loan closing. This gives borrowers a sense of protection, knowing that the interest rates won’t get inflated during the construction phase.
15 and 30-Year Fixed Term Options
Depending on the mortgage term you opt for, whether it’s a 15-year fixed-rate term or a 30-year fixed-rate term, your payment schedule or draw will be amortized over the remaining years after the construction is complete. For instance, if it takes you eight months to complete the construction, your mortgage payments schedule will spread over the remaining 14 or 29 years and four months.
620 Minimum Qualifying Credit Score
There is no specific credit score for VA construction loans, but most VA lenders require a minimum credit score of 620 or higher.
One-Unit Stick-Built House, New Manufactured, Multi-Wide Housing, Modular Homes
VA loan borrowers are expected to meet the minimum property standard requirement for VA loans. A one-unit stick-built house, new manufactured double or triple wide housing, and modular homes are the eligible property types to use a VA construction loan.
Primary Residence Only
VA loans are disbursed for the sole purpose of purchasing homes or building one to serve as a primary residence for the borrowers. The same applies to the VA construction loan, which can’t be used to construct homes for investment or rental purposes.
The VA One-Time Close Construction Loan Process
The VA construction loan procedure has a few extra hurdles that make it different from a regular VA home loan. However, the VA loan is similar to traditional construction loans without additional requirements. The VA one-time close loan follows the following processes:
Provide a Certificate of Eligibility (COE)
When applying for a VA construction loan, you must present a certificate of eligibility. You are eligible for a COE if you have undergone at least 90 days of active duty service or completed six years of honorable service.
Get Pre-approved for a VA Construction Loan
The next stage is to get pre-approved for the VA loan. You’ll need to find a mortgage lender that offers VA construction loans. Pre-approval is crucial in determining the house you can build and the loan amount that will be disbursed.
You’ll also need to meet the guideline and minimum mortgage loan requirements at this stage. The requirements include:
The guide states that you’ll need a minimum credit rating of 620 and above.
Residual income is a common requirement for VA loans. It measures the income left to a borrower after monthly debts and home maintenance cost has been deducted. The minimum residual income requirement varies per loan size, family size (single or multi-family), and location.
Debt-to-Income (DTI) Ratio
Your debt-to-income ratio must not be higher than 41%. A higher DTI ratio can negatively impact the approval of your loan. However, your loan may be considered if you have a higher DTI ratio but still meet the residual income demand. You can calculate your DTI ratio by dividing your total monthly debt by your gross monthly income.
Find a VA-Registered Builder
After the preapproval process, You’ll need to choose a builder. The builder you choose must be registered with the VA and possess a VA Builder ID. You can select a registered VA builder from the Veterans Information Portal.
Close on Your One Loan
To bind your loan as a legal contract, you get to pay your closing costs and your VA funding fee if you do not have it rolled into the loan. The entire closing process could take about 45 to 60 days. After these have been done, construction can now begin.
Get Your Property Appraised
Once the building reaches its final stage of construction, it must be appraised to determine that it meets its proposed plan and the VA minimum property requirements (MPRs).
Make Preparations for Construction to Permanent Loan Stage
For a one-time close loan, the permanent mortgage payment schedule or draws will begin immediately after construction is complete. The payment is spread over a fixed term based on the loan’s balance.
The Bottom Line
Most qualified veterans and other military service men are only familiar with using their eligibility to purchase VA loans for an existing home. Many don’t know they can build a home with the same eligibility.
Also, only a few mortgage lenders offer and specialize in VA one-time close construction loans and are equipped with trained loan officers to explain the loan process to you. If you want to build a newly constructed home and carry out other operations that come with VA one-time close loans, we can help you put it all together. Contact us by inserting your details in the box atop this guide.