topic Re: Question(s) on New Construction Home (VA) Loan in Mortgage Loans

Question(s) on New Construction Home (VA) Loan

krismac — Sat, 26 May 2018 22:46:48 GMT

Hello, everyone. Myself and DH have found our home here in Sonoma County. We are both Active Duty Military and will be using the VA loan for the new construction home. We applied last month to get a pre-approval and was informed that we qualified for around 700k and the home we want cost 620k.

We have been told by our local lender that we would have to reapply in August since it will be around that time that we can get into contract with the builder - we are on a waiting list and that we might have to reapply again in November when the house gets completed. Does this sound right to those that have experience with new construction homes?

One local lender is through Clear Choice Credit Co. Their current offers: 4.35 with 21k for closing costs, 4.95 with 2k towards closing costs.

The other lender we are looking at now to keep our options open, is through Summit Funding - they have an awesome loan officer based in Santa Rosa, CA. We also found out a few days ago that they participate in the GSFA grant program that helps with down payments / closing costs. We know that with a VA loan we don’t need to put a down payment down, but it’s nice to know that they can potentially help with closing costs.

My FICO mortgage scores:
Equifax: 799
TU: 775
Experian: 785

DH’s FICO mortgage scores:
Equifax: 797
TU: 783
Experian: 807

Thanks I’m advance for any insight.

Re: Question(s) on New Construction Home (VA) Loan

Anonymous — Sun, 27 May 2018 23:11:35 GMT

Hi krismac:

The answer is, yes this sounds right. I fully understand what your lender is saying when he states, you “would have to reapply in August since it will be around that time that [you] can get into [a] contract with the builder [and]…that [you] might have to reapply again in November when the house gets completed.” I’ve been through the process myself (with construction lenders and VA lenders) so I am speaking form experience. Suffice it to say, at least you found a lender willing to supply a construction/VA conversion loan. I know of one on this forum, but they are few and far between – too much hassle for so little gain.

You say, “We…will be using the VA loan for the new construction home.” You need to remember that the VA does not grant/give/supply loans, they only guarantee them. Lenders give you the loans and while the VA does have criteria for construction loans, it is hard to find a lender with good rates and conditions willing to give it to you. What you will need is a construction loan and a lender that will give you an interest deferred construction draw, VA conversion loan. Once your home is completed the lender will convert the total value (interest and all) into your new VA home loan (assuming proper appraisals). This is easier said than done in that finding the lender you want may be difficult (but it seems you found one, just ask how interest is applied).

So when your lender says you will need to “reapply in August [when you] can get into [a] contract,” the lender is saying they need a builder’s contract between you two to give you a construction loan. When they say you “might have to reapply…when the house gets completed” they are talking about the conversion from a construction loan to a VA home mortgage. The “might” portion is based upon construction time in that your personal situation (read that to mean DTI and FICO scores) could have changed.

If you recently applied, then there should be no additional hard pull when you reapply in August (it's only a few months) and they should be able to take your VA loan data and apply it to a construction loan. The November date is nearly a guarantee of a hard pull. Good Luck.

Re: Question(s) on New Construction Home (VA) Loan

Anonymous — Mon, 28 May 2018 05:34:55 GMT

That all sounds right to me. We did a VA loan a few years back and the process was fairly easy overall.

And being able to purchase with 0 down is great but anything you contribute will help lower your payments

depending on the amount. But given your data points I would do a bit of additional rate shopping

because I think you should be able to find a lower rate possibly.

Re: Question(s) on New Construction Home (VA) Loan

Anonymous — Mon, 28 May 2018 15:16:00 GMT

With respect to the Zero down VA loan, I have a different perspective. I agree with Dancingbear45 that the more down you put the lower your payments; but think of this. We all know loan utilization ratios are important and with a 0 down your utilization is 100%. That will give you a big hit once the loan is reported. Assume you do have 20% to put into the house. Do you have too (assuming the appraisal comes in properly)? Of course not, so why not take the full loan and then pay it down a little while later.

For example, let’s say you have a house worth $100K and have $20K you could put into it. You have all the credit and DTI to get the 0 down VA; so you have two options. 1) You can put $20K down and have an $80K loan or 2) You can take the $100K loan and pay $20K toward principle after you close escrow (a month or two later). The first case you owe $80K on a new $80K loan that is at 100% utilization. The second case you own $80K on a new $100K loan and have an 80% utilization. Of course the payments will be higher in the second case, but it is just a thought used in the past.

Re: Question(s) on New Construction Home (VA) Loan

krismac — Tue, 29 May 2018 03:19:56 GMT

Thanks for the advise! We are definitely shopping for rates and currently waiting for the Summit Funding LO to get back to us and see what he can offer us.

Re: Question(s) on New Construction Home (VA) Loan

me12345 — Tue, 29 May 2018 06:50:56 GMT

@Anonymous wrote:
With respect to the Zero down VA loan, I have a different perspective. I agree with Dancingbear45 that the more down you put the lower your payments; but think of this. We all know loan utilization ratios are important and with a 0 down your utilization is 100%. That will give you a big hit once the loan is reported. Assume you do have 20% to put into the house. Do you have too (assuming the appraisal comes in properly)? Of course not, so why not take the full loan and then pay it down a little while later.

For example, let’s say you have a house worth $100K and have $20K you could put into it. You have all the credit and DTI to get the 0 down VA; so you have two options. 1) You can put $20K down and have an $80K loan or 2) You can take the $100K loan and pay $20K toward principle after you close escrow (a month or two later). The first case you owe $80K on a new $80K loan that is at 100% utilization. The second case you own $80K on a new $100K loan and have an 80% utilization. Of course the payments will be higher in the second case, but it is just a thought used in the past.

Nobody do this with a VA loan (Or any loan) I'm sorry, this is not a good plan.

Re: Question(s) on New Construction Home (VA) Loan

Anonymous — Tue, 29 May 2018 13:35:34 GMT

Hi Me12345:

Please explain your statement: “Nobody do this with a VA loan…I'm sorry, this is not a good plan.” What I suggested was fundamentally a modification (and acceleration) of the VA’s own Growing Equity Mortgage (GEM) plan. “A GEM has gradually increasing monthly payments, with all of the increase applied to the principal balance…GEMs have a faster accumulation of equity and earlier loan payoff.” So, why is this “not a good plan?” You can see the details at the following government link and scroll down to Page 7-34. https://www.benefits.va.gov/WARMS/docs/admin26/handbook/ChapterLendersHanbookChapter7.pdf

However, the VA guarantees tons of mortgages of all kinds that offer a variety of products to the vet. The VA offers 100% Purchase, Interest Rate Reduction Refinance (IRRRL), and Cash-Out Refinance loans. The “VA will guaranty loans up to 100% of the value of your home.” https://www.benefits.va.gov/HOMELOANS/purchasecashout.asp It may not be for everyone, and all veterans (and property) may not qualify; but why is it “not a good plan?” If the individual is conscientious (and vets tend to be at the top end of responsible persons’ categories in the country), and they have the FICO scores and funds required; then again why is it “not a good plan?”

I fully understand that the VA guarantees a portion of a loan, but for the Purchase and IRRRL that amount is up to $417,000 of the total loan. The cash-out refi is limited to $144,000; but neither of these values were even near my example. Also, GEM is a repayment plan, which can be used on any VA guaranteed mortgage product. I only suggested a rapid GEM. Furthermore, I recognize that on the secondary market the method I described does not contain as valuable a loan as the lower loan; but that has nothing to do with the veteran (only those making money off the vet).

Sure it is easier for the processor to fund the loan with a down-payment; however, easier is not always better. A vet with a 760 or higher middle mortgage score, a fairly low DTI, and the cash sufficient to maintain proper reserves would benefit from what I said. In fact, the VA clearly states, the cash-out loan “is for homeowners who want to take cash out…to take care of concerns like paying off debt, funding school, or making home improvements.” IRRRLs are for reducing the monthly payment (via interest rate lowering) for the vet or for converting an ARM to a fixed rate loan https://www.benefits.va.gov/homeloans/irrrl.asp and GEMs are to accumulate equity, payoff the loan and rebound credit scores quicker.

Re: Question(s) on New Construction Home (VA) Loan

me12345 — Tue, 29 May 2018 19:45:19 GMT

@me12345 wrote:
@Anonymous wrote:
With respect to the Zero down VA loan, I have a different perspective. I agree with Dancingbear45 that the more down you put the lower your payments; but think of this. We all know loan utilization ratios are important and with a 0 down your utilization is 100%. That will give you a big hit once the loan is reported. Assume you do have 20% to put into the house. Do you have too (assuming the appraisal comes in properly)? Of course not, so why not take the full loan and then pay it down a little while later.

For example, let’s say you have a house worth $100K and have $20K you could put into it. You have all the credit and DTI to get the 0 down VA; so you have two options. 1) You can put $20K down and have an $80K loan or 2) You can take the $100K loan and pay $20K toward principle after you close escrow (a month or two later). The first case you owe $80K on a new $80K loan that is at 100% utilization. The second case you own $80K on a new $100K loan and have an 80% utilization. Of course the payments will be higher in the second case, but it is just a thought used in the past.

Nobody do this with a VA loan (Or any loan) I'm sorry, this is not a good plan.

Of course I'm only talking about a No Down loan that someone would then turnaround and pay down 20% instead of using the funds for the down payment to stat with...

1. The bigest issue with this is that with a VA loan you have a Funding Fee and for Subsequent Use, its 3.3% of the loan amount, that's $3,300.00 for every 100K....However, if you put it least 10% down the funding fee is only 1.25%, or $1,250.00 per 100K.

So in the example above, it would cost you over $2,000.00 just so that you could have "Better Loan Utilization" and that's is not even a factor with a mortgage loan.

2. Your fees would be higher, because some fees are based on the loan amount.

3. You would have a higher payment instead of the lower amount for the life of the loan.

4. You may have a higher rate, because of the lower equity position with the 20% down.

There are good reasons to take advantage of the VA No Down program, and advantages to putting money down as well, everyones situation is different and you have to do whats best for your situation....But, nowhere does it make sense to me, to pay the extra costs and fee for doing the No Down program, and the turn around and pay a lot of money down on the loan....it's like throwing the money (Thousands of dollars) out the window.

Thanks,

Re: Question(s) on New Construction Home (VA) Loan

Anonymous — Tue, 29 May 2018 22:49:17 GMT

I agree somewhat and apologize somewhat. We both made assumptions that did not fit the OP’s data. You assumed the vet must pay those funding fees (an assumption). As a disabled vet I assumed the funding fees were irrelevant (disabled vets don’t pay them and as an old man I spend too much time at the DAV with the younger gals and guys coming out of the Gulf). This is an assumption we both made that may not fit all vets, but definitely does those that served in combat and/or were disabled (definitely including anyone awarded/classified a Purple Heart, MH, any Star Award, POW etc. data).

I also must add another disabled vet caveat. In my state (FL) 100% disable vets like me do not pay property taxes. In certain counties lenders can only escrow a maximum of 6-months’ worth of fees (insurance, CCDs, etc.) There are many other disabled vet benefits; however, they vary by state, county, and HOA. Unfortunately, I made that assumption (not about taxes etc., but funding fees) that I should have clarified. For that I apologize – but, without data, respectfully, can (or should) we assume the opposite?