Loan For Buying Land And Building House – Chris is an award-winning former journalist with 15 years of experience in the mortgage industry. A national expert on VA lending and author of “The Book on VA Loans,” Chris has been published in The New York Times, Wall Street Journal and more.
Building your dream home is possible with a VA home loan. But it’s not always an easy road. Here we dive deeper into VA construction loans and how you can build a home with a VA loan.
Loan For Buying Land And Building House
VA construction loans can help qualified veterans finance the purchase of land and construction of a brand new home without the need for a down payment.
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VA construction lenders are challenging to come by. True, $0 down VA construction loans are extremely uncommon in today’s lending environment. Many lenders, including Veterans United, do not currently offer this type of financing.
The good news is that veterans still have options to build their dream home and use their VA loan benefits.
VA construction loans are short-term loans that allow veterans to purchase land and build a custom home as their primary residence. In most cases, VA construction loans and permanent mortgages have separate closings (and related closing costs).
Construction loans are also possible, and permanent financing is managed with a loan at closing before construction begins. For permanent loans it is called one-time close or VA construction.
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Contact an experienced home loan specialist to explore loan options when building a home with a VA loan.
To qualify for a VA new construction loan you will need to meet all of the standard VA loan eligibility requirements as well as additional requirements that you may not find with a regular VA home purchase loan.
Veterans can use a VA construction loan to build a single-family home on land they own or plan to buy. However, VA is prohibited from using VA loans to purchase land. Veterans cannot purchase land with a VA loan unless construction begins immediately after the purchase.
Every home buyer’s situation looks different, depending on the lender they work with, the home builder and many other factors.
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This first step can prove challenging. Most VA lenders do not lend to new construction. We’ll explore other ways to use your VA loan advantage to build a home in the next section.
Credit score requirements, interest rates and other variables can vary between lenders. If you find a reliable lender that offers these loans, you will work with them to close the loan before construction begins. That means you provide the same type of income, employment and financial information for a traditional VA home loan.
The VA does not approve home builders, but requires them to register with the department and obtain what is known as a VA Builder ID card. This is usually available within a few days. The VA maintains a list of approved home builders on its website. You or your builder will provide construction plans to the lender.
The lender orders a VA appraisal based on the plans and specifications of the new build. Immediately, the VA issues a formal notice of listing price of the home’s fair market value. Lenders will lend for the lower of the home’s acquisition cost and its fair market value. Once these key steps are completed and the proposed home meets VA guidelines, your loan can proceed to closing.
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With a true VA construction loan, experts close the loan before construction begins. Lenders make drawings to the builder to cover the construction phase of the new home.
The VA requires a final inspection when the home is completed. The original appraiser usually performs the final test whenever possible. This inspection ensures that the home still meets the VA’s comprehensive property quality guidelines (minimum property requirements) and is built according to proper plans and specifications.
The VA insures a portion of each loan and it is up to individual VA lenders to decide what type of loan they offer. The level of risk in new construction often makes many VA lenders hesitant.
An alternative to getting a VA construction loan is to get a construction loan from a builder or local lender and refinance it into a permanent VA loan.
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Veterans who cannot find a lender willing to do a VA construction loan can consider getting a traditional construction loan and converting it to a VA loan after closing.
Getting a traditional construction loan often requires a down payment. However, in some cases it is possible to recover the initial payment.
When looking for a construction loan, it can pay to shop around. Talk to multiple builders and financial institutions and compare down payment requirements, final cost estimates and more.
Some builders may have programs or deals specifically for veterans and military families. Do your homework and make sure you’re working with a legitimate builder with a track record of successful and satisfied homeowners.
Can You Buy Land With A Va Loan?
Veterans and military members who own land they want to build on may be able to use any equity toward down payment requirements to finance construction.
It is important to understand that construction loans are short-term loans. That means veterans and military members need to start working on permanent financing as soon as possible.
Lenders can take a few different approaches to turning those short-term construction loans into permanent VA loans. Issuing one VA purchase loan and another VA cash-out refinance loan. Guidelines and policies regarding this may vary from lender to lender.
From an underwriting perspective, there is little difference between a VA purchase and a VA cash-out refinance. In both cases, veterans and military members looking to convert their construction loan to a permanent VA mortgage will need to meet the same underwriting guidelines as veterans buying a current home. This includes meeting requirements for credit score, debt-to-income ratio, residual income, and more.
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Additionally, as with VA construction loans, the home must be constructed by a builder with a valid VA Builder’s ID. This is not difficult to achieve, even experts can build the house themselves. Builders often offer a one-year warranty.
Getting a construction loan is an important step, but you’ll want to turn a short-term loan into a long-term mortgage when the home is built. It’s not something you want to wait to explore.
The big difference between a VA purchase and a VA cash-out refinance loan is your ability to get cash back at closing.
With a VA purchase loan, lenders will finance the home’s appraised value less the total payment for construction of the home (and the land loan if that amount is not included in the construction loan).
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On a cash-out refinance, qualified buyers can borrow up to 100 percent of the home’s appraised value. That means veterans and military members can get cash back from home equity, which can help cover the upfront cost of a down payment or other cash outlay.
For example, let’s say you put 10 percent down to get a $300,000 construction loan to acquire land and build a new home. Subtract the down payment ($30,000) and you need to borrow $270,000 to pay off the construction loan.
If the VA appraisal ultimately determines that the home is worth $300,000, you can borrow that amount and get a refund for the difference between the appraised value and what you owe ($30,000 in this example).
Generally, at Veterans United, a borrower must own the land on which the home is built to qualify for refinancing. Otherwise, we treat it as a purchase loan.
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Some buyers may jump at this cash-back opportunity, while others prefer to build equity and start with a small credit balance. Every buyer’s situation is different.
With housing inventory at its lowest level in nearly 25 years, more veterans and service members are looking to new construction. VA mortgage applications for new construction rose slightly in July, while conventional applications for new construction fell, according to new data from the Mortgage Bankers Association.
According to Veterans United Home Loans’ latest Veteran Home Buyers Report, a quarterly national survey of veterans, service members and civilians, building a new home is one of the top three trade-offs chosen by veterans and service members given the lack of inventory. Those who want to buy a house in the next three years.
More veterans try to use their hard-earned home loan benefits to sidestep the inventory issue altogether and build a new home. Of course, it’s not always an easy road.
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It is entirely possible to use your VA loan benefits for new construction. But the process isn’t always straightforward or easy, and some buyers may need cash for a down payment to move things along.
Chris Burke is the author of “The Book of VA Loans: An Essential Guide to Maximizing Your Home Loan Benefits.”