Much has been said about VA construction loans that they seem mythical, unattainable even. But they do exist only that they are harder to come by than most VA purchase loans or IRRRLs.
Their very nature makes VA-guaranteed construction loans understandably rare. You are seeking financing for a home yet to be constructed and subjected to a whole new VA process.
Still, if you are a Veteran looking at new construction this year, this VA loan product might just be the option for you. You might also be eligible for related grants.
Learn more about building a home using VA construction loans.
Building a Home via VA Construction Loans
Also called as permanent mortgages, VA’s guaranteed construction loans allow you to do two things:
(1) purchase and (2) build a home.
The proceeds of the construction loan will pay off the land on which the home will be built on and the rest will be escrowed and drawn upon the actual construction.
During construction, the property will undergo inspections to ensure it meets VA’s minimum property requirements and follows through the construction plans where the property’s estimated value is based on.
The transaction may require three construction inspections, e.g. on the third inspection, a final compliance inspection report is required.
You will start making payments after the home is constructed. On the part of the builder, VA requires it (i) to make interest payments on the loan while the construction is ongoing and (ii) pay all other fees incurred on a short-term construction loan such as inspection fees.
Because it is a VA transaction, you are required to pay funding fee. More importantly, VA will not issue a guarantee (despite the fact that the construction loan is deemed VA-guaranteed upon closing) until it receives the final compliance inspection report.
Challenges and How to Overcome Them
The inspections alone can give lenders cold feet when making these permanent home loans. Plus, the contractor must carry VA approval and provide at least one-year warranty on the new home.
Even if you were to find a lender willing to give you a VA construction loan, the loan might not come without the zero-down-payment feature.
Experts suggest that you obtain interim or short-term builder loans to fund the construction of the home. Then, switch into permanent VA loans via refinancing later.
Also look around for lenders who may be able to treat these loans as typical purchase or refinance loans complete with underwriting package. They may also be able to refer you to lenders who can handle actual VA construction loans.
If you are a Veteran with a service-connected disability, you may be eligible for specially adapted grants.
These housing grants allow disabled Veterans to construct or build a home that is adaptive to their need for access, living independently and barrier-free.
Under these “construction grants”, a Veteran can (i) construct a home on a land that is yet to be acquired or (ii) build a home on existing land suited for a specially adapted home.
Are you up for the challenge?
Looking for lenders offering VA construction loans requires more legwork and diligence than usual. Consider this as the first challenge of the year if you are keen on getting this VA loan.
Keep your options open and never skip talking with a lender for opinion on the said matter.