By Bruce Reichstein
Demand for custom built homes is on the rise and many Veterans who are in the market to build a new home are finding out about the VA guaranteed construction loan program that has been around for years. If you are an eligible Veteran and qualify for a $0 Down VA Home Loan, then you qualify for a $0 Down VA construction loan as well.
Not only can these Veteran borrowers select and purchase their desired lot/land, they can also have a say in the design plans with a home builder of their choice for stick built, modular or manufactured homes. And they will be able to finance both the lot and the entire construction portion of the loan with this $0 down, VA One-Time Close Construction Loan. Let us look at why utilizing the VA Construction loan is on the rise.
VA Construction Loans Have No Maximum Lending Limits
Effective January 1, 2020, the Department of Veteran’s Affairs eliminated the cap on the maximum lending limits. This means that fully eligible Veterans are not constrained when it comes to maximum loan limits available in the county of the proposed property. This is not the case with the FHA, Fannie Mae, or Freddie Mac conventional loans where the construction loan programs are capped by the county limits for each program.
For lenders offering jumbo loans, loan amounts greater than the maximum limits, they require minimum down payments ranging from 5 percent on upwards depending on their company guidelines. While the VA rules are clear, lenders can impose additional guidelines which in the industry is known as “Overlays” and each lender who offers this VA Construction Loan program have imposed a maximum loan amount for $0 down VA construction loan that ranges from $750,000 on up to $1.5 million.
The VA lender’s underwriter will still need to approve the borrower for a VA construction loan that they will be able to afford and still qualify financially. The highest debt-to-income ratio acceptable to qualify for a VA mortgage is 41 percent. Simply put, the debt ratio compares the total monthly debt payments and divides it by the total pre- tax monthly income. The percentage that results is the debt-to income ratio.
In the event the DTI ratio exceeds 41 percent, the VA allows the underwriter to use a residual income guide calculation that can be used with other compensating factors for approval. Residual income is the amount of net income remaining (after deduction of debts and obligations and monthly housing expenses) to cover family living expenses such as food, health care, clothing, and gas. Strong credit history, higher income levels, and long-term employment are a few of several compensating factors used for loan approval.
No Payments During The Construction Phase
The VA Construction Loan was designed for ease of use and not to be constraining on the Veteran. The guidelines will not allow the Veteran to pay any interest costs during the construction phase of the loan. This interest is factored into the builder contract and paid for by the builder. That translates into the Veteran paying no interest during the construction period with their first contractual payment starting the first of the month following a full calendar month after their construction is complete. This is a real advantage because the Veteran does not have to worry about making payments on their existing mortgage or lease as well as pay for the interest loan during the construction phase of the loan.
There is no requalification of the Veteran borrower when construction is completed. Upon initial approval of the construction loan commitment, the Veteran obtains approved after having their credit checked and meeting the minimum credit scores required by the VA Approved originating lender.
In addition, verification of income & employment, bank statements and other qualifying items were validated as well. The underwriter approves the Veteran borrower only after all documentation and information has been verified. The loan is subsequently closed, and the construction draws begin.
When the house is fully completed by the builder, the VA lender does not require any requalifying items from the Veteran. The borrower simply signs additional documents and/or loan modification agreements and no second closing is needed. That is significant because it means the Veteran does not have to pay for any fees which would be charged on a second closing.
Also, there will not be another credit pull and no employment or credit underwriting reverifications because they are not required. Prudent lenders qualify the Veteran at a slightly higher interest rate at closing in addition to securing an extended lock for the period needed for construction. When the construction is completed, the lender requires a note modification which allows the Veteran to get an interest rate at the same or lower rate at which they were originally approved. The VA construction guidelines state that the final note rate cannot exceed the interest rate at the time of qualification. In the rare instance where that may occur, the lender would require new verifications for credit underwriting.
“Demand for the VA one-time close construction to permanent loan has risen due to high demand for custom home construction. This program is especially advantageous to eligible Veterans because they only have one closing and avoid having to requalify for permanent financing after initially qualifying for the construction loan at the beginning,” says Stuart Blend, Regional Sales Manager for Planet Home Lending, LLC, the correspondent division for Planet Financial Group, LLC. “This VA program saves Veterans time and money. Very few lenders around the country know about this program and Planet Home Lending is extremely proud to offer our One-Time Close Construction products to our correspondent lenders as an avenue that includes our Veterans, allowing them to finance a new construction utilizing their hard-earned VA loan eligibility. There is no requalification of the borrower or recertification of the property value upon completion of the home. Mortgage payments do not begin until construction is complete.”
All Veterans with a Service- Related Disability Rating of 10 percent or higher are exempt from paying the VA funding fee. This means Veterans with service-related disability ratings do not have to pay the VA for guaranteeing their newly constructed home (Veterans with no service-related disability pay 2.3 percent on a first time use and 3.6 percent on a subsequent use) and the loan receives the same 25 percent VA guaranty to the lender in the event of default. In addition to no funding fees, this brand-new construction can be specially adapted in the design stage to help Veterans with service- connected disabilities to live more independently and barrier free.
Since the beginning of the year, I have received many requests from Veterans all across the country asking to be put in touch with an approved VA construction lender in their area who are well versed in the VA One-Time Close and know the program well. It is a privilege to do so. Each Veteran has their unique scenario, and it is important to be put in touch with the right VA construction lender that can accommodate their situation. As a Veteran advocate, I am committed to promoting the VA One-Time Close construction loan benefits program as often as possible.
Bruce Reichstein is Chairman and CEO of Warehouseline.com, a warehouse line of credit company specializing in funding VA & FHA One-Time Close Construction to Permanent loans.