Are you considering building your own home? Despite what many people may think, it is possible to build your home and finance it with a VA loan. However, the difficult part is finding a lender to fund that loan. The Department of Veterans Affairs guarantees (or insures) VA loans, and they create many of the regulations associated with them. But the VA does not actually fund the loan; lenders do. Since construction loans can be a little trickier than loans for existing homes, many lenders hesitate to do them. Many veterans will have to finance their home through a different loan program, sometimes even through the builders themselves. However, at Low VA Rates, we have no problem doing VA construction loans for veterans.
How a VA Construction Loan Works
A construction loan itself is short term. This loan covers the work and supplies it takes to build the home and that’s it. When the home is completed, the loan is repaid through the more traditional mortgage loan that the borrower then obtains.
However, the bank or lender doesn’t just hand over hundreds of thousands of dollars to the construction company as soon as they take on the project. The construction company is instead paid in stages.
First, the bank looks at the builder’s plans and evaluates the home’s market value. As each stage of the process is finished, the bank pays, or reimburses, the builder for the funds spent on that specific stage. An inspector will also go out to the site to ensure each stage is in fact successfully completed. Upon completion of the house, the bank will pay the builder the remaining cost.
When it comes to VA mortgages, the loan used to fund the construction will then convert to an ordinary VA loan after construction is complete. In the past, many borrowers had to first get one lender to fund the construction then get another lender to fund a VA loan on the completed home. Luckily, some lenders will now allow you to get one VA mortgage loan to cover the entire process.
Qualifications for VA Construction Loans
VA construction loans are generally treated the same as VA purchase loans, meaning borrowers must meet all regular VA requirements in order to qualify:
- Certificate of Eligibility (COE) proving your VA entitlement
- Debt to income ratio of 43 percent or less
- Adequate credit score
- Residual income at or above the regional requirement
In addition to VA requirements for the borrower, the builder of the home must also get a VA builder ID before the home receives its notice of valuation from the appraisal. If the property is less than a year old, it can be considered a new construction, so a VA builder ID may still be required. Another requirement is that if you are taking the 2-loan route (one for construction and the other for the permanent home), the builder will have to provide the buyer and lender with a one-year warranty on the home.
How Interest Works on Construction Loans
Interest works a little differently with a construction loan because interest is usually charged while the home is being constructed. If the home being constructed is $300,000, you would not be charged interest on that full amount until construction is complete and your loan transforms into an ordinary VA purchase loan. Before that point, you would only be charged interest on the amount that is given to the builders at each step of the process (as explained above).
Advantages and Disadvantages of Building Your Own Home
So you know that funding construction with a VA loan is possible, but is building your own home really the best decision for you? Which is better, buying an existing home or building your own? Here are a few pros and cons to be aware of:
- Get exactly what you want: With older homes, you must settle for one fault or another. There may be fewer bedrooms than you need; the kitchen may feel cramped; or the layout may be inconvenient for your personal hobbies. When you build your home yourself, however, you get to decide every detail–right down to the color of the door knobs.
- Location: In most cases, you get to decide where your home is located. In a new development, you decide whether your home is the one in the middle or at the end of the cul-de-sac. When building on an independent piece of land, you decide where that land is located.
- Cost: Building your own home will cost more than buying an existing home in most cases. Adding custom details that are out of the ordinary will add to the home price, and it’s surprising how quickly extra costs will add up, especially if the cost to build ends up being more than predicted at the beginning. One way to ensure builders stay within the budget is by choosing to do a lump-sum contract rather than a cost-plus contract.
- Inconvenient: It takes time to build a home. To move into an existing home, it may take as little time as a few days, but building a house takes an average of 7 months.
Refinancing VA Construction Loans
If you have difficulty finding a lender or you simply wish to finance the construction with a different lender than the one that gives you the permanent loan, you can easily refinance into a VA loan when the time comes. Even though you are refinancing the construction loan, the new loan is treated like a purchase loan rather than a refinance. The same VA requirements must be met and you will need to get another VA appraisal. Don’t wait to pre-qualify for the long-term mortgage. Once you have funding for the construction loan, immediately seek out funding for the long-term mortgage.
Fund Your Ideal Home
Get exactly what you want from your home by starting from scratch. We at Low VA Rates can help you fund the entire process. We make the process easy to understand and quick to complete. Give us a call today at 855-223-0705 to get started on your VA home loan application.