VA Construction Loans Do Exist: VA Construction Loan Basics
VA construction loans do exist! Many lenders told us the VA does not have a construction loan program. We learned that isn’t the case.
Finding a lender who knows how to process VA Construction Loans is difficult. However, there are lenders out there who know how to do it. We found a lender experienced in processing VA Construction Loans and we built our new construction custom home in Texas using the VA Construction Loan Program. Here’s what we learned when we used a VA construction loan.
What is a VA construction loan?
A VA construction loan is a specific type of loan where the VA guarantees the loan for the construction of a home that will be owned and occupied by a Veteran.
Is the VA construction loan program new?
No, the VA construction loan program is not new. However, because so few lenders knew how to process VA construction loans, the VA has put out new guidance. The VA updated the Lender’s Handbook to provide additional guidance to lenders about how to process a VA construction loan.
When the VA updates guidance or policies, the VA posts a notice called a circular. The VA website has a scrolling and searchable list of circulars on various topics. On April 6, 2018, the VA released Circular 26-18-7 about VA Construction Loans. Circular 26-18-7 https://www.benefits.va.gov/HOMELOANS…
According to the Circular, “the VA received inquiries regarding the procedures to process construction loans. Although the VA currently offers lenders the ability to originate new construction loans, the brevity of the VA guidance has kept many lenders from offering the product. This guidance allows lenders and builders to offer more opportunities to Veterans.”
What information is included in the VA Construction Loan Circular?
The Circular lays out the requirements of the VA construction loan program. It also updates the guidance to lenders to give additional information and guidance on processing a VA construction loan. It says “This guidance is updating the Lender Handbook, Chapter 7, Topic 2.” VA Lender’s Handbook – Chapter 7 https://www.benefits.va.gov/WARMS/doc…
The Lender’s Handbook has over 600 pages, so if you want to see the entire thing, go to https://www.benefits.va.gov and find it there.
Does the VA have information on the VA Construction Loan Program for Buyers?
Yes, the VA has a Buyer’s Guide that is only 52 pages. You can find information about the VA Construction Loan Program on page 17.
VA Buyer’s Guide https://www.benefits.va.gov/homeloans…
How does the VA Construction Loan Program work?
The circular gives an overview of the VA construction loan program. Like many other lenders, the VA offers a one-time close, and a two-time close construction loan. Of course, with the exception that certain costs normally associated with traditional mortgages are capped or waived for Veterans.
Two-Time Close Loan
I’ll start with the two-time close loan. In the two-time close scenario, you borrow money to build the house, which is one loan. You pay Interest-only monthly payments on the total amount of money that the builder uses as the builder completes the home. When the construction project is complete, you take out a mortgage – the second loan. Thus, you have two closings where closing costs are charged. This is a common home-building loan structure for people who purchase or own their land first and then select a builder to build the home later.
One-time Close Loan
The one-time VA construction loan wraps everything up into one loan. This is the most advantageous scenario for many people because you only pay closing costs once. However, that doesn’t mean the overall loan is less money, or that a one-time loan is feasible for your build. The interest payments paid by two-time close customers, and costs and fees are added to the total amount of the loan upfront. As a result, the total amount of your loan and the value of the land+new home will determine if a one-time close loan is appropriate for you.
Regardless of whether you use a one-time or two-time close loan, the VA requires that you use a builder qualified by the VA. The VA also inspects the progress of the home building, to ensure the builder is making adequate and timely progress toward completion and that the final home meets VA standards.
Can I use a VA Construction Loan to pay for the land?
Yes, however, not in all cases. The transaction has to meet VA requirements. For example, you can’t buy the land outright with a VA Construction Loan and build on it years later. If, for example, you buy the land from the builder who is building your home, you may be able to use a VA Construction Loan to wrap the land purchase up into the total loan amount. This depends on the land cost, cost of building the home, and value of the final property.
In our case, we used a two-time construction loan. We purchased the land 3 years before we started building and were still making payments on the land when we started building our home. We added the remaining money we owed on the land to the total amount of the construction loan. We made interest-only payments on the total amount of the construction loan used while the building progressed. Check out our video, Construction Loan Payments Explained, to learn more about the topic.
How do you find a lender?
We had a tough time finding a lender. Most lenders told us that the VA does not offer construction loans. A few lenders that acknowledged that there is a VA Construction Loan program told us they didn’t offer it. We made a lot of phone calls and online searches to find a lender that would process a VA Construction Loan. In hindsight, we should have been persistent in contacting our local VA offices for help. However, that was not easy either.
Why is it so hard to find a lender ?
I don’t know for sure. However, I guess the processing procedures for a VA Construction Loan lacked clear guidance and were notoriously complex and frustrating for a long time. So much so, that lenders just weren’t willing to navigate the additional regulations, policies, and paperwork requirements. Also, many lenders may not know that the VA updated its guidance in 2018 to make it easier for lenders to process VA construction loans. Thus, they lack experience processing VA construction loans and are not interested in starting now.
We hope that this information helps other veterans and their families build their dream homes. Check out our Video and our YouTube Channel for more new home construction information and tips.
