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With the housing market as hot as it is nowFinding the perfect home is no easy task.
If you want to skip the search for an apartment or just have a home tailored to your needs, you can build a house from scratch with a Construction loan.
Traditional home loans typically have higher down payment requirements and higher interest rates than existing home mortgages. But veterans could work around some of these drawbacks with a US Department of Veterans Affairs (VA) home loan.
“VA limits closing costs and VA home loan guarantee means competitive interest rates. These cost savings can run into tens of thousands of dollars over the life of the mortgage, ”says Jeffery London, executive director of the U.S. Department of Veterans’s Loan Guarantee Service.
What is a VA construction loan?
A VA home loan is a loan to finance the construction of a new home. It is issued by a private lender but supported by the VA.
Building loans come in different forms. Because home loans are short-term, high-interest, and designed for home building, many homeowners opt for one Permanent construction loanwho restructures the construction loan into a regular home mortgage after the home is built. This is also known as a one-time construction loan.
“A one-time VA home build loan combines the two loans with a single application and close, and a double-close loan has two separate processes for the build and mortgage phases,” says Andrina Valdes, COO of Cornerstone Home Lending, Inc.
VA loans can be used as one-time loans, but you may need to check with some lenders before you can find one that is ready to finance the construction and mortgage of your home. Check out some blog like 7 day payday loans no credit check
For the best results, look for lenders and contractors who have a lot of experience with VA home loans.
In some cases, this process can require two different lenders. So veterans can choose a VA home loan and then convert that loan into a VA loan for the mortgage.
How does a VA construction loan work?
Since VA home loans are partially guaranteed by VA, they pose less risk to lenders, what Benefits for borrowers.
“In most cases, the VA does not require a down payment for VA loans. No private mortgage insurance (PMI) is required by VA so the cost savings for those using the VA home loan program are substantial, ”says London.
Instead, VA loans require a pre-financing fee. The fee depends on the down payment and whether you have already taken out a VA loan. Financing fees can be between 1.65% and 3.6%.
“When you apply for the loan, you must also provide your construction plans,” Valdes adds. The lender will look at these plans along with your finances when deciding whether to grant you the loan. The appraiser also performs the assessment based on the construction plans and not on an existing house.
To be eligible for a VA loan, you must be a current or former member of the US military. Families of service members may be eligible in some cases.
“Service members and veterans qualify for VA home loan benefit based on meeting the character of layoff and length of service requirements. The first step for any service member or veteran is to get their Certificate of Eligibility (COE) from VA, which the borrower can create themselves or through the lender of their choice, ”says London.
The official one VA website has the full list of requirements plus an online application for a COE (Certificate of Eligibility).
Apart from the VA eligibility requirementsAlso, you need to be approved by the lender the way you want other home loans. The requirements change depending on the lender, but the general requirements for most lenders include:
- Personal credit. The lender has an ideal credit score in mind for borrowers. However, because the loan is backed by VA, you may not need quite as good ratings as a traditional loan.
- Debt-Income Ratio. This number tells lenders how much of your gross monthly income is already allocated to your existing debt. Many lenders look for a DTI ratio below 45% for VA loans.
- Income and employment. Most lenders want you to be in the same industry for a few years, which tells them you have a secure job. Your income also plays a role in the loan amount. It’s always good to get a feel for it how much house can you afford based on your income before starting the mortgage process.
How to Find a VA Construction Lender
It can take some time to find a lender who works with VA loans and is ready to draw up a VA construction loan.
“Definitely look for a lender who is experienced with VA loans – and ask for some examples / figures that confirm their ability to complete them on time,” says Valdes.
A good starting point is your local VA regional office. VA has offices across the country and they may be able to help you with information on lenders working with VA loans in your area.
How to get a VA construction loan
The exact steps you take to get a VA construction loan depend on the lender, your financial situation and the construction project. Here are some of the basic steps you can expect:
- Confirm the eligibility with VA and apply for a Certificate of Eligibility (COE). Before planning your home, make sure that you are eligible for one VA loan. You will also need to apply for a Certificate of Eligibility (COE) to show your lender that you are qualified. The full list of admission requirements as well as an online application for the COE can be found on the official VA website.
- Find a lender and a builder. After you get your COE, you need to find a lender and builder to work with. It is a good idea to use lenders and contractors who are familiar with the VA loan process. This is especially important because of the higher risk and complexity of using a VA loan for construction purposes. If you don’t already own the property you plan to build on, you may need to secure separate financing to purchase the property.
- Submit plans and schedule for approval. Once you’ve found a suitable lender to agree to finance a VA home loan, the construction plans, budget, schedule, and the contractor you will use will need to be approved by the lender. The lender will also check your personal finances to make sure that you can repay the loan amount. These Approval process may take some time.
- Get an estimate of the house based on the plans. Unlike a regular mortgage, the house to be valued does not yet exist. The appraiser therefore carries out the appraisal on the basis of the building plans submitted by your client.
- Complete the loan and start building. If approved, your lender will use the schedule as a guide for disbursing the loan funds to your contractor as needed. While your house is being built, you pay interest on the construction loan. As soon as the construction is completed, enter the repayment period for the construction loan or the loan can be restructured into a classic mortgage.
Advantages and disadvantages of a VA home loan
- Up-front financing fee (not applicable in some cases)
- Lenders can be hard to find
- Must apply for and receive a Certificate of Eligibility (COE)
Should You Get a VA Home Loan?
Because of the favorable terms that come with VA loans, this is a great option for home building as long as you meet the VA home building loan qualifications.
Without mortgage insurance, VA loans often cost borrowers less. However, lenders offering VA loans can be hard to find, especially when it comes to construction projects.
“Don’t be afraid to interview multiple lenders and find someone you really work with – someone who is on the ball and answers your calls and questions quickly,” says Chris Roberts, Loan Officer at Loan Simple, Inc. in the Denver area.
If you have a good credit rating and have saved enough for a down payment, you can qualify for a standard home loan with comparable terms. While VA loans offer financial benefits, there is more paperwork and eligibility requirements. Making the best choices for the lender – and the lender – means looking at the bigger picture.