VA construction loans: Step-by-step guide

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NorbertThompson

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VA construction loans: Step-by-step guide

The VA loan, which is guaranteed by the United States Department of Veterans Affairs is used often to purchase a home. This type of mortgage can also be used to finance a home’s construction or renovation. There are not all VA lenders that offer construction loans. If you do find one, it will take a lot of paperwork to get a VA home loan. Here are some things to look out for.

What is a VA Construction Loan?

You can borrow the VA loan to buy land or build a home from scratch if you are a veteran of active duty military personnel. Alternately, you can use the loan for purchase of an existing home or to modify it to your liking.

Veteran and active duty military personnel who have met the minimum service requirement can be eligible for a VA home loan. They will need a credit score of as low as 640, and higher debt than is allowed for conventional construction loans.

According to Jerry Thomas, who is a Cranbrook Loans loan officer in Clinton Township, Michigan, many are exempt from the VA funding fee. This is a common requirement for VA loans. He says that veterans who receive VA disability income are exempted from paying the fee.

A VA loan for land or construction, unlike a loan for a house purchase, is paid in installments as the milestones are reached. The funds are placed into a draw account and paid to the builder during construction. Although requirements can vary from one lender to another, most lenders require that the borrower approve the loan as soon as the construction phase is completed. After this, the next payment is made to the builder.

VA construction loan requirements

The VA does not support loans for construction or new home purchases. Your service must meet certain requirements. These requirements vary depending on the time you serve.

You are eligible for a VA loan to build your home if you are active duty.

You can satisfy the eligibility requirements if you are a veteran of service between 1990 and present by completing any one of these:

  • Minimum 24 months continuous service
  • If it was less than 90 days, the entire period you were called/ordered for active duty.
  • Minimum 90 days if you were dismissed for hardship or a reduction of force
  • If you were discharged due to a service-connected disability, it will take less than 90 days

If you have served in the military for more than a decade, you can visit the VA’s eligibility webpage to find the appropriate category. In the appropriate dropdown, you will find your minimum service requirement.

There’s good news: If you are eligible, you won’t have to limit your VA construction loan.

How to obtain a VA construction loan

Confirm eligibility and entitlement

To get a VA construction loan, the first step is to get your Certificate of Eligibility. This document proves that you have met all the requirements for eligibility for a VA loan.

Online applications for the COE can be made through the VA eBenefits portal. You will need your DD214 discharge papers if you are a veteran. You will need your DD214 discharge papers if you are an active-duty military member.

Select a lender to get preapproved

The VA does not lend money directly. Instead, you will apply through a bank or credit union that offers VA loans. It can be difficult for a lender to extend a VA loan construction, even if they do offer VA purchase loans.

Thomas recommends that you have a conversation about your construction project with the loan officer and discuss your qualifications. “Ask the loan officer to review your credit, income, and assets. Next, connect your mortgage lender officer and your builder to discuss your program.

If you have been lucky enough to find a lender to lend you money, make sure that you get preapproved. These are the documents that you need to have:

  • Your COE
  • Pay stubs
  • Federal tax returns (for both the past two years).
  • Statements from banks
  • Statements from any retirement account or investment account
  • Driver’s licence or another photo ID
  • If you are already the owner of the land, deed to the survey and settlement statement
  • If you have not yet purchased the land, you can sign a purchase agreement.
  • Contract for construction with the builder
  • Working with a registered builder

You must be a VA-registered, licensed, and insured builder to qualify for a VA loan. You can’t usually be considered the builder. Your lender might have a list that includes builders who are registered with the VA. This means that they have a VA ID Number that tracks their performance. Or, your builder may need to register with the VA.

Thomas says that the VA program holds the builder accountable for the completion of the project within the agreed timeframe and budget. “Not all builders will agree to the VA terms.”

The Veterans Information Portal allows you to search for a VA-registered contractor. To obtain a VA Builder ID, you must ask a builder to submit these items to the VA Regional Loan Center.

  • Information and certification for builders
  • VA Form 26-421
  • VA Form 8791
  • Submit project plans

After your builder has been registered, you will need to submit your plans for construction to your VA loan lender. The paperwork should be provided by your builder detailing the building materials, lot, and future home site.

Thomas explains that you need to have the information you need for a VA loan. This includes the purchase agreement or deed if you own the land. A survey, as well as the contract, plans, and specifications for the home, are very useful.

Get a home appraisal

A VA home appraisal will also be required. This will be done based on your plans. Thomas recommends that you stick to plans and designs that conform to the local standards in order for your home to meet the requirements for a zero down payment loan.

An example: A house plan that is too large or excessive in comparison to other houses, or one with an unusual design could cause your appraisal to be lower than necessary to get the loan.

Close the loan

It can take up to 45-60 days to process a VA home-construction loan due to all the additional paperwork. If you have a VA loan to purchase land or for construction, it is important that you inform the seller of the expected timeline.

The funding fee, which is the VA’s equivalent of mortgage insurance, will be added to the loan amount.

The timeline of the project will determine when the funds are disbursed after the loan closes. You might get only the amount you need to purchase the lot, while your builder may receive a 10% advance. As milestones are reached, the balance of the loan is put into an escrow or draw account.

Final VA inspection

To verify that your home was built in accordance with the original plans, you will need to have the construction completed. The project is considered complete after the final inspection. After the final inspection, the loan will be converted into a permanent VA loan.

What can I do with a VA construction loan to build?

This will depend more on the lender than the VA requirements. This type of construction loan requires VA guidance. The initial project plan appraisal and final inspection are the most important steps. You can borrow as much as you like technically with VA construction loans that are taken out after 2020.

Your lender will want to see that you are able to repay the loan. They won’t allow you to build too much in your locality.

You may need to meet certain requirements regarding the type of house that you can build. For example, a VA loan for home construction is not available from many lenders for mobile or manufactured homes.

The pros and cons of VA construction loans

Pros

A VA loan to finance land and construction comes with many benefits, including:

  • There is no down payment
  • Conventional loans have lower interest rates and terms.
  • Closing costs are lower than regular mortgages
  • No requirement for mortgage insurance
  • No VA construction loan limits

Cons

There are some drawbacks to

  • You must get your COE if you are a veteran.
  • It is important to find a builder as well as a lender who works with the VA.
  • Because of the strict timeliness, some builders will not take on VA loan projects.
  • The VA and the additional steps it adds to the project will make it more difficult.

Locating a VA loan lender

It can be difficult to find a bank or credit union offering VA construction loans. Very few lenders offer construction loans. Even fewer provide FHA and VA construction loans. The U.S. Department of Veterans Affairs provided little guidance on construction loans prior to 2018. This meant that the few lenders allowed to make these loans were left with very limited options.

You should find a lender that offers VA loans in your local area and then go from there. Bankrate can provide you with an estimate of VA loan offers. Not all VA lenders offer construction loans. Ask a loan officer for details about your project. Before you apply for preapproval, make sure that you have all the paperwork ready before you contact a lender.

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