In a previous VAntage Point post, The Plan Collector blogged about how a Veteran could build a new home. They mention that construction to permanent loans can be “difficult to find.” Two years later, more and more lenders are now offering this one-time close product.
However, before you run out to build your dream home with no money down, take a few minutes to read and understand some the guidelines and requirements with this program.
First, you will need a licensed, insured builder that is willing to submit documentation to become an approved builder. The VA program does not allow for owner/builders. While the VA only requires that the builder be registered to participate in the program, each lender can require the builder to go through an approval process.
The borrower and the builder must submit a complete set of plans and specs for the home when applying. Additional forms will be sent to the builder to describe the specific materials to be used and the lot and surrounding area of the future home site.
The builder takes on more responsibility with this loan than with a 20 percent down conventional loan. It’s best to have your builder and lender speak and discuss this early in the process.
Closing costs are a part of the builder’s responsibility. The borrower can pay the closing costs normally associated with a purchase loan, but the builder must pay for all the construction loan closing costs and interest during closing. The VA will allow the builder to incorporate these costs into the agreement to build with the borrower.
Make sure you are building a home that is common in size and design for the area. The home must be appraised per the plans and specs given to the appraiser. If a borrower over builds for the area, or builds an uncommon home, the appraisal may come in lower than needed for a zero down payment.
Don’t build on land that is larger than what would be considered “standard and customary” for the area. The appraiser may feel that some of the land is excessive and again, you may find that the appraisal falls short of what is needed.
Finally, keep in mind that this process takes 45-60 days to process, with an experienced loan officer. If you are purchasing the land as part of this loan you will want to set the proper expectations with the land seller.
FHA and VA construction loans are in the deep end of the mortgage pool. Make sure you are working with a loan officer that understands the program.
About the author: Jerry Thomas is a construction loan officer with 23 years of experience and specializes in VA construction loans.