VA Construction Loan

[armywifelong03]

Hey all! Does anyone know of any lenders that do VA Construction Loans? I know VA doesn’t provided the loans, they only back them. We are working with a local, small and conservative bank right now. Even though our DTI is only 39.7 WITH our current mortgage and we have $9500 residual income every month, they still want us to get our total debt paid down before they’ll approve us. Which we can do, but it’s delaying us even further. So, any thoughts or experiences with lenders that will give construction loans actually based on VA guidelines and not super conservative?

[Anonymous]

You might want to consider Veterans United Home Loans, Navy Federal or USAA. While small local Banks work for many things, they can fall short in other areas. If it were a typical VA Loan, it probably would be smoother. But since it's a Construction Loan it adds complications to the process.

[homeloanexpert]

Hello my fellow Vet! Thank you for your service.

My company does these and they are called a "One Time Close". I have done a quite a few in my time.  They are of course a little complicated as you can imagine, because they are effectively a construction loan and take out loan all wrapped up in one. Many people prefer these because it limits the need to refinance out of a construction loan.

[armywifelong03]

Thank you, homeloanexpert! Can you DM me your information??

[armywifelong03]

Thank you!

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[VALoanMaster]

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@armywifelong03 wrote:
Hey all! Does anyone know of any lenders that do VA Construction Loans? I know VA doesn’t provided the loans, they only back them. We are working with a local, small and conservative bank right now. Even though our DTI is only 39.7 WITH our current mortgage and we have $9500 residual income every month, they still want us to get our total debt paid down before they’ll approve us. Which we can do, but it’s delaying us even further. So, any thoughts or experiences with lenders that will give construction loans actually based on VA guidelines and not super conservative?

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Hi Armywifelong03,

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.