Let me start with the bad news first: You will find it difficult to find a Veterans Administration (VA) construction loan. This is not to say that VA loans for new home construction are impossible to find, but you may wish to consider a non-VA loan for this home purchase. A little background about VA loans to explain my bad news.
VA Loan Eligibility in Brief
VA loans are made by private lenders, such as banks, credit unions, or mortgage companies to eligible veterans for the purchase of a home. The borrower must occupy the house as a primary residence. The guarantee means the lender is protected against loss if the borrower fails to repay the loan. The guarantee replaces the protection the lender normally receives by requiring a large down payment, allowing the borrower to obtain an attractive financing terms at a low or no down payment.
The VA does not approve loans. Transactions are handled directly by the lender with little VA intervention. The VA cannot compel a lender to make a loan that would violate lender underwriting policies. Lender underwriters must comply with VA income and credit standards.
There is no maximum VA loan limit. Lenders will generally lend up to four times the amount of available entitlement without requiring a down payment. At present, the basic VA entitlement is $36,000. For loans in excess of $144,000, to purchase or construct a home, additional entitlement up to an amount equal to 25% of the Freddie Mac-conforming loan limit for a single-family home may be available. This loan limit is adjusted annually and is currently set at $417,000 ($625,500 for loans in Hawaii, Alaska, Guam and U.S. Virgin Islands).
The VA loan process takes five steps, including determining eligibility, qualifying with a lender, shopping for a home, negotiating the purchase, and closing the loan.
VA Loan Eligibility
People eligible for a VA loan must be one of the following:
- Veterans, including Reserve and National Guard members who were called to active duty
- Active duty servicemembers
- Current Reserve and Guard members (usually after 6 years of reserve service)
- Certain surviving spouses
- Discharged commissioned officers of the Public Health Service and National Oceanic and Atmospheric Administration
Length-of-service requirements apply in most cases. Veterans must have been discharged under conditions other than dishonorable. Applicants will need a valid Certificate of Eligibility (COE), which is available online as VA Form 26-1880. You can get one from the VA or from a lender using the Automated Certificate of Eligibility (ACE) program.
Qualifying for a VA Loan
If you fit one of the five categories above, you must meet each of these four requirements:
- The loan must be for the home that you will live in as your primary residence.
- The home must appraise for the loan amount or higher.
- You must have enough income to meet your monthly mortgage payments, maintain the home, take care of other debts and obligations, and still have enough money left over to cover day-to-day expenses (food, gas, etc.)
- You must have a good credit history.
Contact a home loan lender to complete a loan application. Your lender will obtain a credit report, verify your income and help you determine what loan amount you may qualify for. Give the lender your Certificate of Eligibility if available, and complete a loan application. The lender can also obtain a Certificate of Eligibility on your behalf.
Next Steps in Closing a VA Loan
Your next step is to shop for a house, keeping in mind the amount you qualify for. Alternatively, you can select a home and sign a purchase contract conditioned on approval of your VA home loan. Present them with your Certificate of Eligibility if available, and complete a loan application. The lender can also obtain a Certificate of Eligibility on your behalf.
The lender will develop all credit and income information. It will also request VA to assign a licensed appraiser to determine the market value for the property. A Certificate of Reasonable Value will be issued. Note: You may be required to pay for the credit report and appraisal unless the seller agrees to pay these expenses.
The lender's underwriting department will let you know the decision on the loan. You should be approved if the established value and your credit and income are within the lender's guidelines.
You (and your spouse if you are married) will attend the loan closing. The lender or closing attorney will explain the loan terms and requirements as well as where and how to make the monthly payments. At the closing you sign the note, mortgage, and other related papers.
VA Construction Loan
According the VA, "Although they are allowed by law, most lenders do not make construction loans for VA loans, largely due to risks and costs of construction disputes. You can be your own contractor, but you will have to find your own source for construction financing. Once the home is complete, you could then get a VA loan to refinance the construction loan."
Therefore, talk to local lenders in your area to learn if any are willing to underwrite a construction loan that complies with VA requirements. You may want to consider a construction loan, and when construction is complete, refinance to a VA loan.
See the Bills.com resource VA Loans to learn more detail about qualifying for a VA loan, and the costs for a VA loan.
I hope this information helps you Find. Learn & Save.