If you are a veteran or active duty service member, you are almost certainly familiar with the VA loan entitlement program. Under this program, the government will cover 25% of any loan taken out by an eligible person.
As you might imagine, this program is most often used for buying a home. Many veterans have found these sorts of loans to be very helpful, but relatively few people know about one of the best things you can do with your VA entitlement: A construction loan.
What Is A VA Construction Loan?
A VA construction loan is meant for those who wish to commission the building of a new home. Using this plan, you can obtain enough funds to build the home, and enough to cover its cost once built. It is one of many excellent perks that is given to those who have served their country honorably.
VA construction loans are available mainly to service members and veterans, but a close relative of a fallen soldier might be eligible as well. If you are unsure about your eligibility, check this page for a better idea of how things work and whether or not you can qualify.
These construction loans have not been available for very long. They are new to the market and poorly understood by most mortgage professionals. This makes it more difficult to find a lender that will cover a VA construction loan. However, the generous terms of these loans make it all worthwhile.
You have a much larger “safety net” than most home buyers when you use a VA loan. Should you default on the loan, the government will cover a full 25%, and your lender might cover some as well. Either way, there is a lot more forgiveness for this kind of debt than most others.
However, it is important to remember that this is still a risk, even if the government is willing to cover some of the liability. Chances are, you worked and/or fought very hard to obtain these benefits. These benefits aren’t a gift. They are, in fact, a prize that you earned through service. It would be a terrible waste to go through all that hardship only to waste your opportunity at the finish line.
What Are The Terms Of A VA Construction Loan?
In many cases, these loans do not require a down payment. This is a huge plus, as it means that your building project can begin right away. In most cases, loans of this type will stipulate that the home must be built by a certified contractor. This means that you cannot save money by building it yourself or with your relatives.
There is also a requirement that the planned home must serve as the borrower’s primary residence. The entire purpose of this program is to give military veterans an easier path to home ownership. However, the government isn’t going to help you start a business or become a landlord. They also require that any home built under these terms must be connected to all necessary utility lines (electric, water, gas, sewer, etc.) and that the home must be occupied within 60 days after being completed.
That being said, business-related construction is allowed under a VA construction loan, but only if it does not alter the residential nature of the property. For instance, if you wanted to build a large shed to serve as the workshop for a crafting business, that would probably be covered by the VA.
Only One Transaction
When the deal is closed, you will likely be able to enjoy the extra convenience of a single-close deal. Many financial institutions require construction loans in such a way that the deal has to be closed twice: once for the cost of the home, and another for the construction costs. A VA construction loan allows you to consolidate all of that into a single-close deal. Because of this, you will not owe any payments on the construction costs until the building phase is complete.
In essence, this is two loans in one. The construction loan itself is a short-term loan, which is meant to be repaid as soon as construction is complete. Unless you happen to have the entire sum on hand, you will then need some kind of a mortgage plan to handle the repayment of the initial construction loan. Both aspects of the process are equally crucial.
Choosing The Right Builder
Speaking of the construction process, we should also say a few words about the builder. As we mentioned earlier, there are some requirements in this department. Any home builder that you choose to employ must be licensed by the VA. This may seem like a hassle, but it is meant to hold down corruption by making it harder for people to scam the system. If your builder of choice is not approved by the VA, they might be willing to submit the paperwork for approval. Of course, not all builders are willing to jump through those kinds of hoops for you, but the better ones will probably be okay with the whole thing.
In most cases, VA loans do not require any sort of down payment. However, this will vary greatly depending on the lender. Even if you don’t need a down payment, you will probably need a “funding fee.” This is basically just a fee for the processing of the loan application. This funding fee will usually be somewhere between 1% and 2% of the total loan amount.
The Hassles And Downsides
Once everything has been checked, approved, and set into motion, you can expect a waiting period as your information is processed through the proper channels. In most cases, you can expect a delay of 45-60 days. This brings us to one of the only significant problems with VA construction loans.
These kinds of loans have a bad reputation among some professionals. This is due to the extra hassle that comes from them. Not only does there need to be good communication between the borrower and the lender, but there must also be good communication between the VA and everyone involved. Some people can handle this process, and some cannot.
You will also need to comply with a set of building requirements made by the VA. While there is a lot of flexibility as far as what type of home you can build, there are several important limitations to know. These limitations are often called VAMPR, which stands for “VA Minimum Property Requirements.” The requirements include, but are not limited to these rules:
- The home must have direct and public access to the street
- There must be sufficient space between all building to allow for maintenance
- Property must be residential and single-family
- All utilities must be connected
- If the home has multiple units, each one will require separate utilities
- Heating and mechanical systems must be safe and effective
- Roof must prevent all leakage into the home
- Attics and crawl spaces must be properly ventilated
- Must be in compliance with all state and local building codes
How Do I Qualify For A VA Construction Loan?
The first thing that you will need to do is confirm that you are eligible for a VA home loan. Once again, you can use this page to check your status.
Like most construction loans, the term of a VA construction loan begins with an initial stage called the “draw period.” During this time, money is disbursed directly to the builders, with every dime being accounted for in a meticulous process. Depending on the terms offered by your lender, you might basically have a blank check at this point.
This is not as good as it sounds. If your draw period does not have any restrictions on how much money can be borrowed, nor any restrictions on when it can be borrowed, you are probably asking for trouble. In many cases, people will separate the construction process into phases, with a different disbursement accompanying each phase change.
First of all, you cannot have a dishonorable discharge on your record. You must also have served at least 90 days of active duty (for wartime service) or at least 181 days of active duty (for peacetime service). These time requirements are waived for anyone who was discharged due to “service-connected disability.”
Once you have confirmed your eligibility. You will need to contact the VA and allow them to evaluate your case. If you are approved, you will be given a certificate of eligibility. This certificate is then taken to the lender of your choice so that they can verify your approved status.
Even with this certificate, your lender will probably want to do an evaluation as well. You will need to prove your income with check stubs or other financial records so that your lender can confirm your ability to repay the loan. They will probably send an appraiser to evaluate your assets and the land that is to be purchased and used. Be patient with these people, as it is their job to hunt for a problem.
You must also have a sufficient credit score for a loan like this. The exact score required will vary somewhat between lenders, but 620 is a good average. If your credit score is much lower than that, you probably shouldn’t bother.
Your debt-to-income ratio will also play a role. Your debt-to-income ratio (DTI)is basically the amount of debt that you owe in comparison to your income. You can obtain this figure very easily by adding up your monthly debt payments and dividing that number by your monthly income. Just remember this simple equation:
- Monthly debt / Monthly income = DTI (%)
For instance, let’s say that you are paying a total of $200 a month on various debts. Let’s also assume that your income is about $1000 a month. 200 divided by 1000 equals 0.2, which translates to 20%. Based on these numbers, you would have a DTI of 20%. Since most lenders require a DTI of 41% or lower, you would definitely be eligible. As you can see, a little bit of debt won’t be an issue, but excessive debt is very likely to disqualify you.
It is no exaggeration to say that a nation rises and falls by the skill of its soldiers. As such, it is only right and proper that such people are compensated with a few extra perks in society. VA construction loans are one of these perks, as they open up home-buying possibilities to people and families that might not have otherwise had those options. If you have found this information to be helpful, please fill out the contact form below for more of the same.