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If you’re a veteran or active military and are dreaming of building a custom home, it may not be as far off as you think. You may have a lending option that others without your military background don’t have: a VA Construction Loan that affords you the $0 down of the standard VA Home Loan, but can check off more of the wants and must-haves for your home in the process.
Veterans and military members who own land and are planning to build the home on it are able to put existing equity toward the downpayment for construction financing, which could lower your VA Funding Fee and, ultimately, the size of the home loan.
How it works: the basics.
The VA Construction Loan is a start-to-finish loan.
Just like with a VA Loan for an existing home, a construction loan may come from a traditional lender, but you have the support of the VA backing it in case a proverbial rainy day/season threatens defaulting on your loan.
If you’re eligible (make it official by applying for a Certificate of Eligibility, or COE), you apply for and close on one loan covering every phase of the home building process. Note that both you and the builder have to submit the plans and specifications for the home, including information on the materials they will be using and information on the area around the site.
Just as with the VA Home Loan for existing houses, you have low/zero down payment options and access to potentially lower interest rates than with traditional loans.
The VA offers resources and coaching if your finances change while you are still paying the loan, goal being: come out the other side with your finances and your home security intact.
Insider knowledge you need to know: It is typically more difficult to get a Construction Loan than it is to get an existing Home Loan.
Lenders are more cautious about loaning money to fund a home that doesn’t exist yet; things fall through, construction stretches out longer than anticipated, and it’s just considered higher risk.
So, what commonly ends up happening is this:
1) You agree to apply for two separate loans–one short-term construction loan from a builder or local lender, and then one VA Home Loan once the home is finished.
2) You find a lender who will craft a loan plan that will start as a traditional (non-VA) construction loan, then will roll straight into a VA Home Loan once construction is finished.
That requires applying and closing two separate loans–the short-term construction loan and the long-term mortgage loan.
The Security America Difference: We offer a single-close VA Construction Loan that will cover you each step of the way, from land purchase to finished VA Home Loan, all with zero money down.
Money before, during, and after construction
Construction loans and home loans are actually two separate entities. A construction loan is short-term, usually 12 months, to get you through the building process. During home construction, the builder draws money from the lender in increments. You will make monthly payments on the loan, but those will be interest-only payments.Once the building is finished and you have a home to live in, you quit paying a construction loan and begin making a monthly mortgage payment.
When your home is move-in ready, whatever is left in the balance of the construction loan gets rolled into the next phase–the mortgage. At that point, you begin paying on the principal.
Sounds complicated. With an experienced lender, it doesn’t have to be.
Some Guidelines for the VA Construction Loan
— You can’t buy a plot of land on its own with this loan; no residence planned = no loan.
–Since this loan is intended to help veterans get homes, the structure must be residential.
–To get your VA construction loan, you cannot be your home’s builder; you will need a VA registered builder.
–The living space must have space for living, cooking, dining, and sleeping.
–The VA requires water, electricity, gas, and sewer to be available for the unit.
The VA and Registered Builders
The list of VA registered builders may be obtained on the Veterans Information Portal home page.
If you’re already sold on a particular builder who doesn’t have a VA Builder ID, the experts at Security America can walk them through the process of registering with the VA, which is refreshingly uncomplicated..
Builders are not actually approved by VA, so there’s no application or vetting process—just registration in order to obtain a VA Builder ID number.
If you’re a builder:
To obtain a Builder ID number, three items need to be submitted to the Construction and Valuation unit of the local VA Regional Loan Center having jurisdiction over the area where you will be building the home.
Information concerning VA Builder ID number requirements can also be found in the VA Lenders Handbook (VA Pamphlet 26-7), section 10.07, page 10-14.
On new construction homes, the VA requires a 1-year builder’s warranty or a 10-year insured protection plan, but some builders offer additional protections or warranty options. Talk through each option and determine which warranty plan best fits your needs.
Things to consider: would you rather pay for additional warranty protection or for repairs, and what are some potential costs of each? Could you set aside the same amount of money and put it in an emergency fund with more flexibility?
–According to the VA construction loan rules, your first mortgage (that is the loan for the finished home) payments are not due until construction is complete; the builder will have one year to complete construction.