As you know the mortgage industry is experiencing some unprecedented challenges today and ahead. As…
I WAS QUOTED IN AN ARTICLE ABOUT VA CONSTRUCTION FINANCING
I’m happy to say that Jeanne Sager, a writer for Lending Tree, interviewed me about VA Construction Loan Financing. I’ve linked to her article and pasted the questions she asked to help her get it going. Thanks again Jeanne, great article!
The Interview
Q. What’s the difference between a VA loan and a VA construction loan? How common are the latter?
A. The difference between the two is that the VA Construction Loan Financing-One-Time Close Construction loan program provides interim construction financing, lot purchase (if need be) and permanent loan all wrapped into one while the traditional non construction VA loan is used to purchase or refinance an existing structure. This is a relatively new loan and the numbers are a little unknown, but I can tell you that the 2010 National Veterans Survey for those respondent who used a loan other than VA stated that 33.6% didn’t even know about the VA loan program. 62.8% of older veterans said their lender never discussed the VA loan option with them, and 25.8% of younger veterans lender did not discuss the VA loan with them. 8.1% said their Realtor or lender discouraged the use of the VA loan. Clearly this is an issue and I assume there are few veterans aware of this fantastic resource. There are not a lot of mortgage professionals doing these, my competition is sparse in this area because most mortgage professionals simply don’t understand it.
Q. Why are these types of construction loans valuable for folks?
A. In certain markets it’s nearly impossible for a qualifying veteran to purchase a home because of the low inventory and competition among other buyers. This VA Construction Loan Financing loan allows the veteran to purchase a bare lot and cover the cost to construct the home all in one. There aren’t any 100% loan to value lot loans and the competition for that type of property is practically nonexistent. This isn’t a lot loan, but it definitely provides much more flexibility than traditional purchase methods. It’s really a great option for first time home buyers looking for affordable options from the lack of existing homes on the market.
Q. Who qualifies for a VA construction loan? Why?
A. Basically any veteran, active duty military, or eligible surviving spouse who qualifies for a non-construction VA loan qualifies for the VA one time close construction to permanent loan program. I can provide you all of the requirements for that, but there are many variations so I don’t want to put it all down here.
Q. What kind of credit, debt-to-income ratio, etc., must a prospective borrower have?
- 620 minimum fico is
required - Permanent loan can
be a 15 or 30 year fixed - Eligible properties
are 1 unit, manufactured homes(multiwide only) and modular homes. Must be
primary residence. - Maximum Debt to
Income is calculated by the automated underwriting system, there is no
published maximum, but the residual income requirement must be met as with all
VA loans.
Permanent loan can be a 15 or 30 year fixed
Eligible properties are 1 unit, manufactured homes(multiwide only) and modular homes. Must be primary residence.
Maximum Debt to Income is calculated by the automated underwriting system, there is no published maximum, but the residual income requirement must be met as with all VA loans.
Q.Can you explain the certificate of eligibility I keep reading about?
A. The certificate of eligibility(COE) shows the amount of entitlement the veteran has in use. The entitlement is the dollar amount of guaranty or insurance the VA provides to the lender in the event of a default. Based on the county the home is located in the VA will guarantee a maximum percentage of the loan amount with this entitlement. If the veteran already has an existing VA loan it will impact the amount of entitlement available for further use.
Q. What are the requirements that come with building a home using a VA construction loan? I know there are(Whatever you had after this portion on your email was cut off….
A. The VA requires the builder to register, be approved by them, and have a VA builder ID number. The VA also require that there are minimum property requirements and I’ve attached a pdf that covers most of it.
Q. Can you walk me through the steps to get one of these VA construction loans?
- Pre qualification- As with any loan we need to
determine that the borrower will qualify for the loan they’re looking for, this
includes a credit check, copies of income documents, assets(if needed) etc.
- Builder/Retailer
Registration(We need to make sure the builder or retailer is reputable and
has experience finishing construction projects on time and on budget) - Deal
Calculation(We need to figure out what the total loan amount will be, this
includes and closing costs due, seller or builder concessions, interim
interest, etc.) - Underwriting (Credit & Construction)- We submit
the loan to underwriting, they review the income, credit, assets, as well as
the construction cost estimates, list of materials, assuring the builder is
approved by VA, that the property conforms to local building codes, etc.
Q. How is it different from a conventional loan?
A. Traditional construction loans require a large down payment, they carry adjustable rates, and require the borrower to requalify after construction in order to convert the loan to permanent financing. This loan allows up to 100% financing of the entire project, including the cost of the lot, subject to the maximum county loan limits which you can find here https://www.fhfa.gov/DataTools/Downloads/Documents/Conforming-Loan-Limits/FullCountyLoanLimitList2019_HERA-BASED_FINAL_FLAT.pdf The loan amount can exceed the county loan limits, but they would be required to contribute at least 25% of any amount that exceeds the county loan limit.
Even the closing costs can be worked into the loan amount, the interest rate is locked at close, not 12 months from now when the home is completed, and
Q. Any pros to using this kind of loan?
- There is no
“requalifying” the borrower after construction is complete because everything
is done up front before the purchase closes, meaning the borrower doesn’t need
to worry if their situation changes. So there will not be any new
appraisals or credit reports, or requalification of income, and the best thing
is that there are no additional fees. - There are no
payments due while construction is being done, therefore the veteran need not
worry about carrying a mortgage payment and rent payment at the same time. - The rate is locked
prior to closing (and construction) for the life of the loan. - The loan is 100% in
place prior to the beginning of construction
Q. Any cons?
- No “Self-Help”: The
borrower cannot be responsible for or perform any aspect of the construction/site
improvements. Nor can they be responsible for hiring any sub-contractors to
perform such work. - You cannot build a
unique style of home, including log cabins, multi units, metal homes, tiny
homes, etc. - VA loan amount is
limited to county loan limit or - Change orders may
not be allowed with some lender
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