Using a VA loan to build a new home is similar to using a VA loan to buy an already existing home. However, there are a few important distinctions. As many people already know, the U.S. Department of Veteran Affairs (VA) backs home loans to eligible military borrowers. Since the VA doesn’t actually lend money, but instead insures lenders against possible default, every loan has different requirements.
Here’s what you can expect with the VA construction loan process:
You must be eligible
Just like a VA purchase loan, VA construction loans require a Certificate of Eligibility from the VA during the application process. The COE confirms that applicants are either veterans, active duty service members, national guards or reservists and have met a few basic service requirements.
The bank will need to see your plans
When building a new home, the lender will want to see plans and cost estimates for the future construction. Some lenders may also require a detailed construction scheduled with target dates and deadlines.
Find a builder
The VA keeps a list of available builders on its website. The VA does not approve builders, it simply requires them to register. Once a registered builder is selected, the lender may require more information, such a licensing and insurance.
The lender disperses funds
Once the loan application is approved, the lender will release the necessary funds to purchase the land where the new home will be built. If you already own the land, this step is skipped. Once the land is secured, any additional funds are transferred into an escrow account. It is this account from which the builder is paid.
The lender will make periodic payments to the builder as the construction progresses. These payments are predetermined based on construction timelines and deadlines. While no payments are typically due until the construction is complete, the loan will start accruing interest with each draw.
A mortgage conversion
When all is said and done, the construction loan will be rolled into a standard VA loan, which typically carries a 15- or 30-year payment term.
For more information on VA construction loans or to apply, contact us today by filling out the form to your right or calling (888) 320-7888.