As many Veterans and their families search for solutions to today’s housing shortage, families find the best way to accomplish their dream home is to build a home on their own lot. This has led to increased interest in the VA One Time Close Construction Loan and information on how the program works and what options are available. The great news is Security America Mortgage, Inc. is an industry leader in VA One Time Close Construction Loans with an extensive knowledge base and experience from helping many Veteran families through the VA One Time Close Construction Loan.
VA Construction Loan Texas: Understanding Payment Options During Build Time
One of the many topics to cover when choosing a VA One Time Close Construction Loan is how payments are made and collected during the build time. The primary difference between VA and non-VA Construction loans is that the VA does NOT allow the Veteran to make payments while the house is being built. This brings us to the primary difference between the two VA Construction Loans to choose from.
Interest Only Payment Option for VA Construction Loan Texas
- The first option is what we refer to as the “Interest Only” option. This is where we calculate and collect the interest-only payments that would normally be made during the building process and add them to the principal loan amount. So, the veteran does not make these payments out of pocket but will finance these payments. For example, if the build time is 8 months, we would calculate the interest cost based on the build cost and the number of draws the builder requires, then total this number to be added to your loan.
- The second option is what we refer to as the “Principal and Interest” option. This is where we will calculate the principal and interest payments of your VA 30 years fixed mortgage based on the build time and add these payments to your loan amount. These are the first payments of your VA 30 years fixed loan. When a Veteran uses this option, it will shorten the number of months left on the loan when the build is complete. For example, if the build time is 8 months, when the home is complete, the loan will have 29 years and 4 months left, and the payments previously collected are applied to the 30 years mortgage.
Which VA Construction Loan Option is Better?
I am often asked, which is better? Well, it really depends on your goals and your personal perspective. The interest-only option will typically result in a smaller loan amount because the principal is not added, but when the home is complete, you will start your VA 30 years fixed mortgage from the beginning. However, the interest-only option will typically come with a higher interest rate compared to the principal and interest option.
Comparing Interest Rates in VA Construction Loans in Texas
On the interest-only option, your interest rate will float to whatever the current market VA 30-year fixed rates are up or down. On the principal and interest option, the VA 30-year fixed rate is locked upfront, and your permanent rate is reflective of today’s VA 30-year fixed rates. Many veterans like this because the interest rate is lower, and the principal and interest payments are known and agreed upon prior to closing, leaving the Veteran knowing exactly what the monthly payment and interest rate will be.
Interest Only VA Construction Loan Option: A Risk or Reward?
However, the interest-only option could also provide the Veteran with a lower interest rate, but this all depends on where the interest market is when the home is complete.
Many Veterans like the interest-only option due to the lower loan amount and smaller financing costs. Both options are great tools for Veterans to build a home and use their VA entitlement.
In addition to the interest only option providing a lower loan amount depending on market interest rate conditions, the Veteran could also end up with a much lower permanent interest rate. This depends on where rates are in the beginning before the build begins and where interest rates are when the home is complete.
Interest-Only Option: VA Construction Loan Flexibility in Texas
In today’s market, many believe that interest rates are headed on a downward trajectory. If this is true, then the interest-only option gives the Veteran a chance to take that risk without needing to refinance in the future. Again, the decision comes down to each Veteran’s view on these topics. This is why it’s challenging to say which version is better than the other. It totally depends on the individual.
Benefits of the Interest Only VA Construction Loan in Texas
Another positive detail of the interest-only option is that it resembles a traditional conventional construction loan, only the payments are financed instead of being paid out of pocket as the build is completed. This sometimes makes it easier to understand and compare.
Why Veterans Choose the Interest-Only Option
The interest-only version of the VA One Time Close Construction Loan still has all the benefits of the VA program: you can qualify for a 100% or no down payment, and you have flexibility with the debt-to-income ratios and credit requirements. Veterans will find this option opens access to building your own home, where you want to build it, without the heavy upfront requirements or out-of-pocket cash requirements of the conventional construction loan counterpart.
Conclusion
With the interest-only option, Veterans can know exactly what the borrowing cost will be before they close on the loan, which is another benefit compared to the conventional construction loan. The conventional construction interest payment can fluctuate based on the builder’s completion, draw frequency, and draw amounts. The interest-only option provides a fixed amount the Veteran can be assured will not fluctuate after closing. This provides greater transparency and peace of mind that the financing cost of the home will not change during the build, and the build is held to its stated build time.
Veterans now have these two great VA Construction loan options to consider when researching for the right VA Construction Loan. Reach out to us to discuss which one of these VA Construction Loan options may be best for you and your family.