We are offering a Construction Loan for Veterans program, using your VA Benefits, that requires no down payment and very low closing costs! You are allowed to find your own general contractor (they must be licensed in NC) however we can not allow you to do the work.
This program is for single family residences up to the VA home limit of $484,350. Maximum loan amount for a construction loan for Veterans is limited to: the lesser of VA reasonable value (appraisal) or the acquisition costs plus cost to energy efficiency improvements up to $6000 plus the VA funding fee.
To calculate the Acquisition Cost for a VA Construction Loan… take the Contract to build + Cost of lot + Interest Reserve + Contingency reserve + Permits (if not included in contract to build).
In January of 2020, the VA Home Loan program will not have a maximum Loan Limit – meaning you can buy a home with your VA Home Loan benefits, and go over the Fannie Mae Conforming Loan Limit. As with most changes, the devil is in the details, and since it’s a few months away, we will need to update you on how that twist is going to work. I’m pretty certain that the VA Funding Fee will increase slightly at the same time.
“To get the builder approved by the Veteran’s Administration, we must have VA Form 26-421 and VA Form 8791 and a Builder Information and Certification form.
Fees allowed by the VA state that the maximum construction fee is 2% of the loan, provided that the majority portion (51% or more) of the loan proceeds are paid out by the lender during the actual progress of the construction loan for Veterans. If the portion for construction is less than 51% then a 1% or less construction fee is allowed.”
The construction loan for Veterans program has some additional Construction Loan Fees that we charges that are similar to our other construction loans. There’s an origination fee of 1%, construction perm set up fee, loan modification fee, processing fee and underwriting fee. There are also multiple inspection fees and the title work will need to be updated during construction – so that’s a little bit more as well. With normal closing costs, these VA Construction Loan fees will generally equal 3%.
When you apply for your VA Construction loan, we will detail all of the fees and reserves required.
Construction Loan for Veterans – How to Build A House Using VA Benefits
While you are building the home, no payments are made, meaning you are not paying the mortgage down. Instead an interest reserve account must be set up at closing to pay for interest during the construction period.
Let’s say your first “draw” for the Builder is for the lot and the footings, clearing the land, that sort of thing and it adds up to $35,000. With other construction loans, you would be paying interest on that $35,000 each month. Then as the building continues, the amount you pay each month will increase, as you pay the builder for framing and the roof – etc.
The Construction Loan for Veterans program doesn’t work that way.
The Interest Reserve we set up must be brought to the closing with other closing costs but can be financed into the loan if the appraisal value supports it. We set up the interest reserve account by using 1/2 the loan amount x interest for the period of the construction.
For example if the VA Construction Loan amount is $300,000 and interest rate is 5% and the term of construction is 9 months ‐ $150,000 x .05 = $7500 /12 = $625 x 9 =$5,625 would be collected at closing from the borrower. (This is not a rate quote, I’m just trying to give an easy example of the math)
Although no down payment is required, we also need a 10% contingency reserve established. These fees are set aside for cost overruns. Sometimes this is added to the contract price, and if it is not used, it will be applied to the principal balance. Again, this 10% contingency is not coming back to the Veteran once the home is complete – and it’s in addition to the Interest Reserve we set up.
READ: You will need money to be able to use your VA Benefits to do a construction loan to build a house.
Cash back to Veteran is allowed when down payment funds come directly from the borrower and can be documented in the file for the lot purchase and the final loan amount does not exceed the appraised value.
Payment of draws to the builder will be set up with a Maximum of 5 draws. Each draw requires the inspection of the project inspector or original appraiser. Draws will be made by a two‐party check payable to the borrower and contractor. This gives the Veteran more control over the process.
Borrowers are permitted to pay for change orders and upgrades out of pocket. Meaning if you go to the lighting store, and you find this super cool light fixture for the kitchen that is $575 and you only budgeted for $350 for a light fixture – you will just pay that sort of thing along the way.
Change orders after the appraisal is completed cannot be mortgaged into the new loan, unless the Veteran pays for an additional appraisal with the new change orders included in the value. This is different than most Construction loans.
Because of the way the Construction Loan for Veterans Program is put together – we can allow you to get a new appraisal at the end of the new home project, and if it adds value, up your final loan amount.
If yo have more questions about Construction Loan for Veterans please call Steve and Eleanor Thorne, we will be happy to give you the details for your specific situation. You can also connect with us on Facebook, or find us on Instagram.
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