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New VA Construction Loan

ArsenalGunner
Regular Contributor

New VA Construction Loan

Has anyone used this yet? I know it's very new. From what I've read you can get a VA new construction loan where you close one time (vice two closing with standard construction loan) and the closing is done prior to construction starting. The lender pays the builders as funds are necessary to construct the home (buyer is always in the loop with funds being supplied). I understand there aren't many lenders who have offered this yet but I imagine there will be as more time passes and more people request it.

Message 1 of 5
4 REPLIES 4
VALoanMaster
Valued Contributor

Re: New VA Construction Loan


@ArsenalGunner wrote:
Has anyone used this yet? I know it's very new. From what I've read you can get a VA new construction loan where you close one time (vice two closing with standard construction loan) and the closing is done prior to construction starting. The lender pays the builders as funds are necessary to construct the home (buyer is always in the loop with funds being supplied). I understand there aren't many lenders who have offered this yet but I imagine there will be as more time passes and more people request it.

Hi ArsenalGunner,

You need to know upfront that the VA One Time Close construction loan that most of us lenders have access to is going to cost you quite a bit more than if you were using a VA mortgage to buy an existing home.

 

For example: The interest rate is going to be at least 1% higher & the fees associated with the construction "side" of it will add about 6% of your cost to your loan amount. So if your total take out cost is $300,000, you're going to need a loan amount of at least $318,000 & that doesn't even include the closing costs for the loan.

This can actually be a deal killer depending on whether or not you're getting a good deal from your builder. Here's what I mean. If it's going to cost you the same or more per sq ft to build than what houses are selling for in your area, then you'll end up in a situation where your cost exceeds the appraised value which means you'll have to put money down. I had deal last year where the costs to build went 50K over what the finished home would appraise for so the Veteran canceled that contract & went with an existing home.

Does that make sense?

 

The builder will have to fill out several forms & provide a lot of information upfront. I've had several builders push back on this & even back out of the deal.

It will take 50+ days to get you to the closing table once you've provided everything needed.

 

I'm not saying this program is terrible but there are things you need to know upfront so you can make an informed decision & unfortunately, a lot lenders won't tell you all of this upfront. They'll get you to engage in the process of collecting documents & forms & give you a little bit of information here & there until you're so far into the process that you just go through with it. I call it the close by a thousand paper cuts.

 

There are benefits to doing this type of loan.

1) It's VA so as long as you have enough entitlement, you won't need any money down.

2) The One Time Close program allows you to include the purchase of the lot which cuts down the number of closings you have & that saves you money on closing costs.

3) You will not make any payments during the construction of the home like you would with a traditional construction loan.

4) VA loans are easier to qualify for.

5) This is the hardest benefit to quantify: You lock in your permanent interest rate at the beginning of the process vs later with a traditional construction loan. Here's what I mean. On the One Time Close loan, you can lock in your rate pretty much as soon as you make application. Now compare that to a traditional construction loan. If it takes 9 months to build, you typically won't be able to lock you rate on your perm loan until you're 90 days or less from closing so that means your perm rate isn't locked in for 6 months. We have no idea what rates are going to tomorrow let a lone 6 months from now.

 

One more thing to "watch out" for.

Some lenders will pitch you that this is just a "stepping stone" to get your home built & that the lender will come back & do IRRL or streamline refinance to get you a lower rate once the home is done & you've made 7 monthly payments on your mortgage.

The downside with this is 2 fold.

1) There is no guaranty that the rates will be lower. If it takes 9 months to build & you have to make 7 payments, that puts you almost a year and a half later. Chances are, rates will be higher.

2) Every time you refinance you add more money to your loan balance for closing costs.

 

Again, I'm not saying that this program is a bad option as long as you know what you're getting into upfront.

 

Good Luck.

VA Mortgage Expert. Mortgage Banker lending in All 50 States.
VA, FHA, USDA. Jumbo, Conventional.
CAIVRS Expert.
Message 2 of 5
ArsenalGunner
Regular Contributor

Re: New VA Construction Loan

Hi VALoanMaster - thank you so much for such a detailed and informative response! I have copied and pasted your response to a word doc so I can use as a reference once I get within earshot of applying. I do see the good and the not so good reasons to use this option. I think if I can attempt to calculate the costs against my all my options I can make a pretty good decision with that. Thank you again so much for your help!!

Message 3 of 5
homeloanexpert
Established Contributor

Re: New VA Construction Loan

I have done several of these OTC's. They are a lot work and the rates and fees are much higher than a straight VA. But if you are truly going to build your own home (not just buy a new construction home), then you will certainly have more sweat equity that can offset the costs. You will need to do a refi because as already stated, the rate will be at least 1 to 1.5% higher, so you need to factor in double closing costs.

Mortgage Banker - Since 1988 offering FHA, VA, USDA, Conventional, Jumbo, Portfolio and Non-QM Loan Products. Licensed in AL, AR, AZ, CA, FL, GA, ID, IL, IA, IN, LA, MI, MO, MS, NC, NV, OH, OK, OR, SC, TN, TX, VA and WI.
Message 4 of 5
ArsenalGunner
Regular Contributor

Re: New VA Construction Loan

Thanks, homeloanexpert! Yes, the idea right now it to do an outright build (read not buy just a new construction). When you say do a refi, do you mean a little down the road after all is said and done? If so, I suppose it would depend if the refi rates are actually lower than mortgage rate. But yes, if that's what will happen, the higher rate, I will for sure do a refi later. It will to do another closing but it will be well worth it in the long run. Thank you again!

Message 5 of 5
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