One-Time Close Construction Loan: Get the Facts

No money down. Finance your lot.

New home constructionConstruction loans can be tricky, especially if you're a veteran. Fortunately, VA one-time close construction loans available can make the process easier. This article will explore these loans and how they can benefit you.

What is a VA one-time close construction loan?

A VA one-time close construction loan is available to qualify active duty, National Guard, Reservists, and veterans. It can be used to pay for the construction (including the land) and the mortgage with just one loan.

There is no need to own the land on which the home will be built. You may roll the equity into the loan if you own your land. If there is an existing lien on the property, it is paid off and moved into the new loan.

You may purchase land and pay for home construction expenses with a VA One-Time Close construction loan.

Who is eligible for a VA One-Time Close Construction?

As with any VA loan, the borrower must be a member of the U.S. military on current service, a veteran, or a surviving spouse. Required is a Certificate of Eligibility (COE). Other qualifications for participation in this program include the following:

  • Active-Duty military personnel and veterans must fulfill the VA or lender's minimum income, credit, and property requirements.
  • Evidence of two years of continuous work.
  • The minimum qualifying credit score of 620 or greater.
  • Your debt-to-income ratio should be at most 45%.
  • Based on your residual income, you can still be eligible for a VA mortgage even if your debt-to-income ratio is higher than 45%. Residual income refers to the funds that remain after paying your monthly expenses.

Eligible Property Types for a VA One-Time Close Construction Loans

Many different property types can be purchased with a VA one-time close construction loan program. Some of the most common include:

  • Single-family homes
  • Multi-family homes
  • Condos
  • Townhomes
  • Manufactured homes
  • Modular homes

For a VA one-time close construction loan to be approved, the property must be for your own use. You cannot have any intentions to utilize the house as an investment or to rent it out, so you must intend to live there as your main residence.

Loan Term

15 and 30 years

Loan Limits

Most lenders use the county-conforming loan limits for VA new construction mortgages. The 2023 maximum loan amount in most counties in the United States is $726,200, and a down payment may be required for loans with amounts more significant than the county limit.

How Do VA New Construction Loans Work?

If you're a military borrower using your VA home loan benefits to build a home, you may wonder how the process works. A VA one-time close construction loan allows borrowers to finance both the purchase of a property and the construction cost in a single loan. That means no need to take out a separate construction loan and then refinance it into a permanent mortgage after the home is built.

Here's how it works:

With a few more obstacles, the application procedure for a VA construction loan is identical to that for a standard construction loan.

 Usually, the process involves these eight steps:

  1. Request your Certificate of Eligibility (COE) online, or ask your loan officer to obtain the COE on your behalf.
  2. Get pre-approved by a VA lender. You will provide the lender with pay stubs, bank statements, and all the typical documentation for loan approval. The pre-approval will establish the maximum loan amount that you are qualified for.
  3. Choose your builder and verify that your builder is listed with the VA
  4. Send the lender the building plans and specifications. The new home must meet the minimum property requirements set forth by the VA. 

    Your builder must submit Form 26-1852 (along with a copy of the construction plans). The builder must also include a list of all the building materials for approval.
  5. Provide the lender with the plans for the new home. Your builder must submit a breakdown of all expenditures associated with the building of your new house, with the total amount matching that on the Construction Contract.

    Your lender will often supply the cost breakdown form to be completed and will have particular criteria for the determination and disbursement of draws to the builder.

    Some lenders determine draws using a line-item percentage of completion technique. In contrast, others may use a project percentage of completion method. Typically, payments are distributed based on finished work.
  6. Complete the loan closing. Your loan has now become a binding contract, so it's time to pay your closing fees, including the VA financing fee, and celebrate so that construction can begin.
  7. Once the house is complete, it must be inspected to ensure it complies with local building codes and VA minimum property requirements (MPRs).
  8. Get ready for the permanent loan to start. When the house is declared complete, the permanent loan payment plan will immediately begin if you have a one-time construction loan. The total loan sum will be used to determine the payment. You will swap out the construction loan for a new mortgage with a two-time closing.

What are the benefits of a one-time construction loan?

Young family at closingThere are several advantages to a VA construction loan with a single closing. The most prominent benefit is that the certification procedure needs only be completed once.

With a conventional construction loan, you must qualify both for the loan and when you refinance into a permanent mortgage. This may be an expensive and time-consuming operation.
Another significant advantage is the ability to lock in your interest rate in advance. The interest rate on a conventional construction loan is fixed upon refinancing into a permanent mortgage. If interest rates rise during the building time, you will pay more than if you had secured your rate beforehand.

Locking in your interest rate in advance with a VA one-time close construction loan may make you sure of your monthly payments once your dream house is complete.
The most significant advantage is that no payments are required during construction.

You must make interest payments on a conventional construction loan during the building phase. This may strain your budget, mainly if you are simultaneously saving for the down payment on the permanent mortgage.

With a VA one-time close construction loan, no payments are required while the house is being built, allowing you to concentrate on saving for the down payment and closing fees.

FAQs About the VA One-Time Close Construction Loan

Q. Is mortgage insurance required for a VA construction loan?
A., Unlike FHA loans, mortgage insurance is not required for VA mortgages, including construction loans. However, the VA loan program requires a funding fee.

Q. When do mortgage payments for a VA construction loan begin?
A. Home loan payments begin after the home is built, and you should discuss your repayment terms directly with the lender.

Q. What are the construction loan interest rates?
A. For any mortgage guaranteed by the Department of Veterans Affairs, the lender determines the VA interest rates. Borrowers should search around to discover the best interest rate, just as with any mortgage.

Conclusion

In conclusion, the VA one-time close construction loan is a great option for eligible borrowers looking to build their dream homes. The loan offers competitive interest rates, low closing costs, and the ability to roll all financing into one loan. Whether you are contemplating constructing your own house, consult with a loan officer about the VA one-time close construction loan to see if it meets your needs.

SOURCE:
VA One Time Close Construction Loan
Things to Know to Build a Home Using a VA Construction Loan

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