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Understanding the VA Construction Loan Process

By Steven Roberts Updated on 1/7/2015

Construction of a home

The U.S. Department of Veteran Affairs (VA) allows eligible military borrowers to acquire VA mortgage loans to fund the purchase of both existing and new home constructions. Consider the following factors for VA Construction Loans and the process of constructing a home with VA funding.

When financing the construction of a home through a VA mortgage loan, banks may impose additional requirements with respect to down payment, often raising the minimum down payment up to 20% to cover the associated risks. While this may seem to undercut VA guidelines, the banks ultimately assume the risks of lending and thus set the minimum standards for borrowers.

VA Construction Loan Process

Applying for a VA construction loan follows the same general process as applying for a standard VA mortgage for home purchase. Prior to all lending considerations, borrowers must satisfy VA eligibility requirements. Borrowers must also obtain a VA Certificate of Eligibility and fill out a VA loan application.

Once pre-approved for the VA mortgage loan, funds will be initially disbursed to finance the land purchase where the prospective property will be constructed. Afterward, the remaining funds of the mortgage will be transferred to an escrow account, from which the builder will be paid. When withdrawing funds for payments from the escrow account, the lender will require permission from the VA borrower in writing.

Make VA construction and mortgage payment.

Unlike the traditional payment schedule of VA mortgages, VA construction loans vary depending on if the borrower purchases an existing property or a new construction home. In the former case, borrowers will begin mortgage payments immediately, although for the latter, borrowers will not pay until construction has been completed.

Borrowers who secure VA construction loans will be responsible for the mortgage payments that accrued during the home construction, but at a later date. For instance, if the home construction takes 12 months to finish, the borrower must pay an adjusted monthly mortgage in order to compensate for the time that the mortgage was unpaid during home construction. Alternatively, borrowers may elect to pay a balloon payment at the end of the loan term to cover the deficiency.

Either way, borrowers can best anticipate these payments by depositing mortgage payments into savings during the construction phase of the process. Once the home is finished and payments start, the homebuyer will already have money in reserve and will not risk falling behind on either higher interest rates or a balloon payment.

Find a VA construction loan lender.

To locate a VA construction loan lender, use online resources to find lenders in your area that offer this unique program. To avoid wasting time or money on an inexperienced lender, make sure that he or she fully understands the VA program, as well as the home construction process prior to making a commitment.

If you are seeking a VA Construction Loan Lender, visit our Find a Lender page in order to locate  lenders in your area. By selecting the type of loan, you can ensure that you find a reliable lender with experience in the applicable field.

Find a builder.

Constructing a new home with a VA loan often depends on finding the right builder for the project. Typically, builders will begin construction prior to even locating a buyer, often referred to as “spec building” or speculation. This requires a large investment of builder time and money, the profit from which depends on whether the home will eventually sell for greater than the expense of construction. With many builders taking substantial losses during the housing crisis, VA borrowers can alleviate these builder risks by committing to a home construction project, thus giving the builder the incentive to cut a deal.

Make an offer.

When making an offer to a builder with a VA construction loan, borrowers should follow these four simple steps:

Get pre-approved.

Borrowers should apply for VA loan pre-approval prior to beginning negotiations. With pre-approval, borrowers will demonstrate to the builder their commitment to the project and their ability to qualify for the home purchase. In addition, borrowers may also provide the builder with the contact information of the VA loan officer to further facilitate serious negotiations and for additional information if necessary.

Put forth a down payment.

After approaching a builder, borrowers must next put forth a reasonable amount for the new home’s down payment. In general, borrowers should put forth an amount that they agree upon with the builder. While making a sufficient down payment will illustrate a serious commitment to the agreement, borrowers should avoid paying too much. Rather, borrowers should use their pre-approval as justification for making a smaller down payment and as proof of commitment. If necessary, contact a qualified realtor or real estate attorney for assistance during these negotiations.

If you own the land, use it to your advantage.

Borrowers who own the land outright or have an adequate amount of equity accumulated will have an advantage when bargaining with the builder. However, borrowers who negotiate using the equity within the land should always consult a legal expert in order to ensure that everything proceeds smoothly.

Negotiate interest payments.

During negotiations, another topic fthat will most arise is who should pay the interest which accumulates while the home is in the process of construction. In general, the home buyer pays the cost of interest during home construction, and should offer to pay these expenses as incentive for the builder. Under these circumstances, borrowers should always check the cost of home construction to ensure that they are not being billed twice. If all goes according to plan, borrowers may be able to reduce the overall home price for the purchase.

VA Construction Loan without Land

Borrowers who do not own the land for home construction may actually find the process somewhat simpler, due to the fact that bringing a builder to a new site will fundamentally be more difficult than going to the current job site. Borrowers should locate a suitable community and look for ongoing projects in the area, using the same process as explained above. Remember, the ultimate goal of these negotiations is to provide incentive for the builder and minimize the risk that he or she assumes in order to facilitate a deal.

Choosing an existing construction home.

Borrowers should generally choose a home that is early in the process of construction, ideally immediately after the ground breaking. By choosing a less constructed home, borrowers will have more opportunities for making custom choices to the design and layout. Although the builder may request funds for the cost of any design alterations, these expenses will typically be less overall than the cost of the 20% down payment.

Get a Quote for a VA Loan

If you would like to secure a VA home loan, visit our Get a Quote page to conveniently receive interest rate quotes from lenders in your region.

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About The Author:
Steven Roberts
Steven Roberts is an editor for Lender411. He specializes in mortgage and finance. Steven graduated from Cal State Long Beach. Contact him at Steven@Lender411com.

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