New home construction allows you to build your home to your exact specifications, but if you are a veteran, you might be disappointed to learn that VA loans are not often used for new construction. The good news is that construction loans work in two phases – the second phase is when your VA entitlement will usually kick into effect.
The Construction Phase
The construction phase of new home construction is the part of the process that it is typically hard to find a VA lender to fund. This is when the home is being built and the lender provides the funds for the construction. The borrower typically pays only interest during this time since they usually need to pay for housing elsewhere while their new home is constructed.
Because of the level of risk during this loan process, most VA lenders are not willing to provide 100% of the construction costs for a construction loan. Veterans are usually better off finding the funding for this part of the process through their local bank or the builder themselves. In fact, many builders have veteran programs specifically for those that served our country, knowing that they will probably not be able to use their entitlement on the construction phase of the loan.
Turning the Loan Over
Once the home is completely constructed and has passed its final inspection, it is ready for its permanent home financing. The first phase of the loan was temporary; the second phase pays off that temporary financing and gives the borrower a loan for the next 15 to 30 years. This is when VA funding can come into play as most VA lenders are willing to provide funding at this point.
When the home is ready for occupancy, a VA lender can provide a loan for the new home construction. The stipulations for this loan will be the same as if the borrower were purchasing an existing home. The veteran will have entitlement for $36,000 as a basic entitlement and any amount up to $68,250 depending on the cost of the home in bonus entitlement. Because the VA guarantees 25% of the loan amount, this gives veterans the chance to purchase a home for up to $417,000 or the maximum amount allowed in their area.
Qualifying for a VA Loan with New Home Construction
Once you know that you have new home construction temporary funding, you can start working on your VA loan. You will need to verify the same things you would have to verify if you were to purchase an existing home. You have to show the lender that you have stable income and that you can afford the loan. The lender will not put a lot of emphasis on your credit score or your debt ratio; instead he will focus on the amount of money you have left over after you pay your mortgage and standard monthly expenses. This residual income is what predicts how comfortable you can live after purchasing the home.
You can receive 100% of the funds necessary to purchase your newly built home, just as you would an existing home. The only difference is that the lender will be paying off the entity that holds your construction loan rather than paying a seller directly, as would occur with an existing home. Everything else remains the same including the low interest rates, low closing costs, the funding fee, and the terms of the loan.
It is best to shop around when you are looking for a new home construction loan and not to depend on VA financing for the preliminary part of the process. Once the home is built and ready to live in, though, you should take advantage of your VA benefits and secure a no down payment loan that allows you to have affordable payments for the term of the loan.