If you’re shopping for a home and you’re not finding anything on the market that fits your needs, you might consider building your own house. While a VA loan can be used to finance the construction of a brand new home, it can be difficult to find a lender that will issue one. In this guide, we’ll explain how you can use a VA loan to fund a new-home build, how the process works, and how to find a lender that will offer VA-approved financing.
Construction Basics
When you decide to build a house, you’ll need a construction loan. And unlike a traditional VA mortgage, the entire loan amount isn’t disbursed all at once but in stages. As the home is completed, the lender wants the construction loan paid off and this is done with your VA home loan.
You’ll work with your architect to design your home and provide you with your blueprints. Take some time with this and don’t be afraid to change things as you go along. In fact, most blueprints aren’t the same from start to finish as clients change some things around or add amenities as the project progresses. Once the prints have been completed, it’s time to show them to your General Contractor.
Your contractor will then review the plans and prepare a quote based upon the plans and specifications laid out by your architect. The contractor will provide an extensive list of materials needed and other “hard costs,” including labor. You’ll also be provided with a list of “soft costs,” which are fees needed to pay for permits and zoning compliance.
But just like you searched for the right VA lender who issued your initial preapproval for a mortgage, you should also get bids from more than just one general contractor. Three should be sufficient. You want to perform your fair share of due diligence here to make sure the contractor is experienced and there are no legal issues or claims against the contractor. You also want a contractor that has built homes similar to the one you’re going to build.
While they’re preparing an estimate for you, you should also contact your selected construction lender to make sure the builder is on the lender’s approved contractor list. If the contractor is not on the list, there is a process to get the contractor approved. However, experienced contractors in your area are more than likely on that lender’s approved list but you need to know this information in advance as it can affect which contractor you choose. Once you select your contractor and you have your estimate, it’s time for a personal visit to your construction lender.
Lender Basics
The lender will then review your plans and specifications. The next step is to order an appraisal on the project. The appraisal will appraise the property as if the home has already been completed, referred to as “As Completed” value. Construction lenders like to see some equity in the property and a common amount of equity is 20% of the appraised value. If the appraised value comes in at $350,000 for example, the lender would issue a construction loan at 80% of that amount, or $280,000. In this amount is an allotment for “change orders.”
It is then your responsibility to take care of the $70,000 equity requirement. However, most often this 20% equity requirement comes in the form of the land you already own. If you’re going to get a loan to finance the construction, as well as buy the lot, the $70,000 is then in the form of a down payment from you.
The contractor will provide a report that identifies different stages of construction in the form of a Construction Schedule. Broken down into different stages, the lender and the contractor agree to a draw schedule, when each stage is expected to be completed, and when the home will be ready for occupancy. Remember, the construction lender isn’t going to receive the entire $280,000, but paid out as instructed in the draw schedule.
For example, an initial draw might be for permits, stakeouts, and lot prep. Once the lot has been cleared and ready for foundation work, another draw is issued and the contractor continues. As each agreed upon stage is completed, a new draw is issued. At each issuance, the construction lender sends out an inspector to make sure the work is on schedule until the home is complete and ready for move-in.
Your construction lender now wants its money back. You can do this with your VA home loan benefit.
Permanent Financing
The VA construction loan was temporary and needs to be permanently replaced. During construction, interest on the amounts drawn accrues. This interest is typically paid each month during construction.
Your lender who issued your initial preapproval needs to begin updating your mortgage loan application as the documents you originally provided are several months out of date. Loan documents, credit, income, and employment will all need to be re-verified and you should begin this process at least 30 days out from the expected completion date of your home.
Once the builder issues the certificate of completion, you will schedule your final closing. Your lender will order loan payoff amounts from the original construction lender. The settlement agent will prepare a final settlement statement that will show the loan amount, closing costs, and down payment (if needed). At the closing, the settlement agent sends your signed VA home loan documents back to the lender who will review and release funds for your VA home loan.
FAQ
Can a VA loan cover both the lot purchase and the home construction costs?
Yes, but if you do not already own the land, you will generally be required to provide a down payment to satisfy the lender’s equity requirement (often 20%). If you already own the lot, the equity you have in the land can count toward that requirement instead.
How are construction funds released to the general contractor during the build?
Funds are not released in a single lump sum. Instead, the lender and contractor agree to a draw schedule based on a Construction Schedule. As each stage of construction (such as lot prep or foundation work) is verified by an inspector, the lender releases a portion of the funds.
When does the permanent VA loan take over the temporary construction loan?
Once the home is finished and the builder issues a certificate of completion, you schedule a final closing. The permanent VA home loan releases funds to pay off the original construction loan payoff amount. You must begin updating your income, credit, and asset documentation with your mortgage lender about 30 days prior to completion.
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