The VA loan provides 100% financing, but does this work for new construction too? Technically it does. The VA does allow lenders to provide VA construction loan financing with no down payment. The problem you may run into is finding a willing lender. There aren’t many out there.
Typically, what VA lenders offer is to refinance your construction loan with your VA benefit. In other words, they encourage you to secure your construction financing elsewhere and then come back and pay it off with the VA loan when the home is built.
However, there are some VA lenders that will allow it. We’ll discuss their requirements below.
Finding the Right Builder
If you use VA construction loan financing, the VA has a say in who builds your home. That seems odd since you are the one living in it, but the VA/lender takes a big risk providing you with this financing. Essentially, they are giving you funds for a home that does not exist. If something happens and the builder never finishes building the home, the bank loses the money they funded. It’s a big risk.
The builder you choose must be licensed and insured. He must also either be approved by the VA already or be willing to go through the approval process.
The builder will go through a process with the lender before the lender will approve the funding. The builder must provide complete specs on the home to be built. He must also be willing to disclose the materials he will use to build the home. The VA and lender may also ask questions about the lot the home will be built on.
As a part of the VA loan process, the builder will have to pay the closing costs. This differs from a conventional loan where the borrower is responsible. The VA will not allow veterans to pay these costs, though. The only closing costs the borrower can pay are the standard costs associated with the loan. Things like underwriting and credit report fees are common. Any closing fees tied into the building of a new home is the builder’s responsibility.
Disbursing the Funds on a VA Construction Loan
Once you find the right lender and builder, it’s time to get to the fun stuff –building the home. The builder cannot start until the loan closes. The lender will disburse any funds necessary to purchase the lot to build the home at the closing. Any other funds, however, will be placed in an escrow account.
The lender will disburse the funds as deemed necessary prior to the closing. As a part of the builder/lender agreement, a disbursement schedule is created. This is based on the builder’s experience and what he knows he will need as he gets through each phase of the building process.
Before the lender can disburse the funds, however, the VA requires that you approve it. Basically, you are approving that the building is complete as the lender states and that you approve them to move onto the next step.
Refinancing the VA Construction Loan
Once the home is built, it’s time to refinance the VA construction loan. Remember, this financing was temporary. It was just a way to get the builder the necessary funds to build the home. Now it’s time for permanent financing.
Don’t worry, it’s not a typical refinance though. In reality, it’s like a VA purchase loan all over again. You’ll have to have a 620 credit score, 43% max debt ratio, and meet the disposable income requirements for your area. The home must meet the Minimum Property Requirements and be ready for you to live in it right away.
Once you refinance the VA construction loan, you have permanent financing and are free to live in your home. If you can’t find VA financing for the construction portion of the loan, you can use any other type of construction financing, such as builder financing. You can then refinance it into your VA loan using your VA benefit.