Facts About VA Construction Loans
June 24, 2011 
Bruce Reichstein 
In times when the housing market isn’t as robust as it should be, new construction home loans aren’t as much in demand as they would otherwise, but there are still plenty of house hunters interested in exploring this option.
The Department of Veterans Affairs allows VA loans to be used for both existing construction and new construction properties, so a borrower shouldn’t hesitate to ask a lender about the new construction option.
The process for applying for a new construction VA loan is the same as applying for a VA loan to purchase an existing home–the borrower must have a VA certificate of eligibility and the borrower must fill out a VA loan application. Once approved, the VA loan is closed before construction begins.
After the loan closes, there is an initial disbursement money used to purchase the land where the home will be built, and the remainder of the proceeds from the loan into an escrow account. The builder is paid from this account.
For all payments from the escrow account, the lender makes the payments with the permission of the VA loan applicant in writing.
VA construction loans are not the same as other VA home loans because the payment schedule is not the same. A borrower who closes the deal on an existing construction property would have a payment schedule which begins right away, but VA borrowers with new construction home loans don’t start paying on the loan until the construction is finished.
But the borrower is responsible for paying based on the terms of the loan–a 30 year loan for example, goes into effect once the deal is closed. If the construction process takes one year to complete, the borrower would be responsible for paying an adjusted monthly mortgage based on the “unpaid” time of the mortgage while the home was being built. Or the borrower could have a “balloon payment” at the end of the lifetime of the loan to cover that unpaid time instead.
Either way the payment is arranged, it’s best to anticipate this unpaid time by making a mortgage payment to a savings account during the construction phase. When construction is complete and mortgage payments actually begin, the buyer already has the money set aside and won’t feel the sting of a balloon payment or higher mortgage rates.
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I’ve searched for info on VA Construction Loans and there are many articles. But, who actually offers it?
We are having this same problem. Finding a lender who does VA Construction Loans. Did you have any success finding any?
Please let us know if you find someone. We are looking too.
I’m wanting to find a lender that does VA Construction Loans, as well.
There are many questions on this site about VA Loans and how they fit into new construction. It’s my understnding that VA does not currently offer “New Construction Loans.” However, I have been informed about a method where I apply for and get a construction loan through the home builder and then at final closing, after the final appraisal, pay off the construction loan with my VA loan. Could you please address this scenario so I have an idea what to expect? Thanks.
The VA technically does guarantee new construction loans (see below), but many lenders may not be willing to offer them at this time until the housing market improves or other conditions make offering such loans feasible for the lender. Best advice is to contact individual lenders for their current policies.
From the VA Lender’s Guide, Chapter 7: “VA will guarantee a “construction/permanent home loan,” that is, a loan to finance the construction/purchase of a residence. The loan is closed prior to the start of construction with proceeds disbursed to cover the cost of, or balance owed on, the land, and the balance into escrow. The escrowed monies are paid out to the builder during construction.
The lender must obtain written approval from the borrower before each draw payment is provided to the builder.”
This section does not address other construction loans guaranteed by VA;
that is, those for the purchase of a residence newly constructed for the veteran by a builder who financed the construction from his or her own resources.”