Building your dream home is a possibility with a VA home loan. But it isn’t always an easy road. Here we take a deep dive into VA construction loans and how you can build a home with a VA loan.
Building your dream home is a possibility with a VA home loan. But it isn't always an easy road.
VA construction loans come with a unique set of challenges making it difficult for qualified borrowers to find lenders willing to do a true $0 down VA construction loan.
While the VA insures a portion of each loan, it's up to individual VA lenders to determine what kind of loans they'll issue. And the level of risk in new construction often causes many VA lenders to shy away.
Like many other lenders, Veterans United does not make VA construction loans to build new homes. What’s more common is getting a construction loan from a builder or a local lender and then refinancing that into a permanent VA loan. That's something we do help Veterans with every single month.
As the homebuilding process wraps up, qualified borrowers can turn that short-term construction loan into a permanent VA mortgage.
Getting a traditional construction loan often requires a down payment, although it may be possible to recoup that in some cases. We'll talk more about that shortly.
When it comes to looking for a construction loan, it can pay to shop around. Talk with multiple builders and financial institutions and compare down payment requirements, closing cost estimates and more.
Some builders may have programs or deals, especially for veterans and military families. Do your homework and make sure you're working with a legitimate builder with a track record of success and satisfied homeowners.
There are also restrictions about using the VA loan to purchase land. Borrowers can't use a VA loan to purchase unimproved land with the goal of one day building a home on the site. There are traditional land loans for this purpose, but they typically require a down payment as well.
Veterans and military members who own the land they want to build on may be able to use any equity they have toward down payment requirements for construction financing.
Veterans who don't already own land can often include purchasing it in their overall construction loan.
It's important to understand that construction loans are short-term loans. That means it's imperative for veterans and military members to start working on the permanent financing as early as possible.
Lenders can take a couple of different approaches to turn that short-term construction loan into a permanent VA loan. One is to issue a VA purchase loan, and the other is to make a VA Cash-Out refinance loan. Guidelines and policies on this can vary by lender.
Veterans and military members hoping to turn their construction loan into a permanent VA mortgage will need to meet the same underwriting guidelines as veterans purchasing an existing home. This includes meeting requirements for credit score, debt-to-income ratio, residual income and more.
From an underwriting perspective, there's little difference between a VA purchase and a VA Cash-Out refinance.
The home will need to be constructed by a builder with a valid VA builder ID. These aren't hard to get, and it's even possible for veterans to build the home themselves. Builders will often need to provide a one-year warranty.
New construction still requires a VA appraisal. However, the appraiser may be able to base the initial evaluation on the home's plans and specifications with a final inspection to follow once the home is complete.
These are just a few reasons why it's important to talk with a VA lender at the beginning of the process.
Lining up a construction loan is a critical step, but you'll need to turn that short-term loan into a long-term mortgage once the home is built. That's not something you want to wait to explore.
The big difference between VA purchase and VA Cash-Out refinance loans is your ability to get cash back at closing.
With a VA purchase loan, lenders will lend whichever is less between the home's appraised value and the total payoff for the home's construction (and the land loan if that amount isn't included in the construction loan).
On a Cash-Out refinance, qualified buyers may be able to borrow up to 100 percent of the home's appraised value. That means veterans and military members may be able to get cash back at closing from the home's equity, which could help defray the upfront cost of a down payment or other cash outlays.
For example, let's say you put down 10 percent to secure a $300,000 construction loan covering the acquisition of the land and construction of the new home. Subtract the down payment ($30,000), and you're left needing to borrow $270,000 to repay the construction loan.
If the VA appraisal ultimately determines the home's value is $300,000, you might be able to borrow that amount and get back in cash the difference between the appraised value and what you owe ($30,000 in this example).
Guidelines on loan-to-value ratio and other requirements can vary by lender.
Generally, at Veterans United, the borrower would need to hold title to the land on which the home is built in order to be eligible for a refinance. Otherwise, we would treat it as a purchase loan.
Some buyers may jump at this cash-back opportunity, while others prefer to keep building equity and start with the smaller loan balance. Every buyer's situation is different.
To sum up, it is absolutely possible to use your VA loan benefits for new construction. But the process isn't always simple or straightforward, and some buyers may need money for a down payment to get things moving.
Your Certificate of Eligibility (COE) verifies you meet the military service requirements for a VA loan. However, not everyone knows there are multiple ways to obtain your COE – some easier than others.
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