How VA Construction Loans Work
VA home loans aren’t just for veterans and current military members looking to buy an existing home for sale on the market. They can also be used to buy a piece of property and have a home built on it. A VA construction loan isn’t as popular in tough economic times, but plenty of veterans do seek them out. How do they work?
A VA home loan for new construction must be applied for with VA eligibility like most other new purchase VA home loans. Once approved, the VA loan is closed before construction begins and there is an initial disbursement of loan money to purchase the land. The rest of the loan money goes into an escrow account and is paid out to the builder during the construction phase of the project.
The money is paid out by the lender, but the lender must get the VA loan applicant’s written permission before each payment is made to the building company or contractor.
VA construction loans are quite different than other VA home loans for one important reason–the payment schedule is not the same. Borrowers do not pay on the VA home loan until the construction is complete. But during that time of non-payment the borrower is still held to the original terms of the loan–including the repayment time.
If a buyer applies for a 30 year government home loan and construction takes one year, the payments may be adjusted to cover the remaining 29 years or there could be a balloon payment at the end of the loan to cover the remaining amount owed.
Either way the payback is arranged, smart home buyers anticipate the “down time” on new construction mortgage bills and make a mortgage payment to themselves in an interest-bearing account during the construction phase. When construction is complete and mortgage payments actually begin, the buyer can pay the first year from that account. Buyers are not required to do this, but it makes good financial sense.
For those who choose the “balloon payment” option at the end of the loan, it’s important to note that in the case of VA construction loans, the Department of Veterans Affairs makes an exception to the rules when it comes to the final amount due.
According to VA.gov, “VA’s amortization requirements that payments be approximately equal and principal be reduced at least once annually apply to construction loans…However, the final installment requirement is different. The final installment may be for an amount that does not exceed 5 percent of the original principal amount of the loan.”