Can i build a house with no money?
Do you want to build a new home from scratch? Are you an active service member or a veteran?
In this case, you can qualify for a VA home loan, sometimes called a VA home loan.
This loan can be used to finance everything from the purchase and construction of real estate to a permanent mortgage for the finished residence. And as with all VA mortgages, no down payment is required for eligible borrowers.
The catch? VA construction lenders can be hard to find. So you may need to do some digging.
Learn more about what is required, how to qualify, and if a VA home loan is right for you.
In this article (jump to …)
What is a VA Home Loan?
If you are an active service member or veteran with valid service history, or a surviving spouse, you may be able to avail of a generous U.S. Department of Veterans loan program: the VA Home Loan.
For eligible borrowers, a VA home loan can make building your dream home easier.
"The benefits of a VA home loan include no down payment, no credit minimum, and no private mortgage insurance for the VA loan," said Richie Duncan, senior loan officer at VA Nationwide.
And the VA building loan is flexible. The funding can be used for:
The total cost of buying land, building a home, and financing the permanent mortgage on the residence once it is completed. With this option, there is only one underwriting process, one valuation, one set of closing costs, and one closing. This is known as a one-time VA home loan. The combined cost of buying land and building a house on it. After that, your VA home loan can be refinanced into a separate loan VA permanent mortgage loan. This option has a one-time appraisal and deal associated with the short-term loan, but the VA permanent mortgage loan requires a separate underwriting process, appraisal, and closing cost. Building the house on land you already own or finance separately, after which your VA home loan can be refinanced into a separate permanent VA mortgage loan. As with option 2, there is a single assessment and deal for the VA home loan, but the VA permanent mortgage loan requires a separate underwriting process, assessment, fee and deal
The only problem is that VA construction loan lenders are difficult to find. If you can't find a willing lender, you may have to choose alternative financing options instead.
Check your eligibility for construction loans (April 20, 2021).
The VA home loan process
According to Julie Aragon, CEO and Founder of the Julie Aragon Lending Team, the VA home loan process involves a number of steps:
Your eligibility for VA benefits will be verified by obtaining a Certificate of Eligibility (COE) and providing personal financial information to the lender. Be prepared to collect and review copies of current credit reports, proof of income, bank statements from current bank and investment accounts, and any other financial documents the lender may request. Find a lender that offers VA home loans and get pre-approved. Note that the VA does not provide direct loans. So, you need to look for a private lender who offers this program. Select a licensed builder / general contractor who has been duly licensed and approved by the VA and submit your home construction plans to the lender. If your VA home loan does not include a permanent mortgage loan component, you will need to refinance to a VA home loan after the home is built
"Note that with VA Construction Loans, the funds to be paid to build the house are paid out in a series of installments or" draws "at specific milestones as construction progresses," explains Aragon.
VA construction loan requirements
Several rules apply to VA construction loans, including guidelines for the borrower, the contractor, and the home being built.
First, you need a decent credit score.
“While VA guidelines do not require borrowers to have a minimum loan value or meet other financial criteria, most actual VA lenders will. In order to improve your chances of eligibility, aim for a minimum score of 620 to 640, ”recommends Aragon.
Your debt-to-income ratio (DTI) should be below 41%. You need to meet income requirements based on the size of your family. You must not have experienced bankruptcy in the past two years. You need a stable income and stable employment. You need to be able to easily afford mortgage payments
Prepare to review two years income when applying for a VA construction loan.
For W-2 borrowers, collect the last 60 days of payroll, the last two years of the W-2, and your last two annual tax returns. Self-employed borrowers should obtain the last two years of full individual and corporate tax returns and any related tax plans.
The house to be built must also meet certain requirements, including:
The finished house must be used as the main residence. The types of homes that can be built include single family homes, condominiums in approved projects or legal stages, and prefabricated homes. Your total construction / permanent mortgage loan amount cannot exceed $ 548,250. B. 10 acres. The property must be inspected by a specialist approved by the VA
"Note that local regulations determine the real estate requirements for your VA home loan," explains Dan Holtz, Co-Founder and CEO of the Sovereign Lending Group.
Lender / Contractor Requirements
Finally, there are restrictions on which lenders and contractors you can work with.
You must select a VA approved mortgage lender who will participate in the VA home loan program. The VA must approve the contractors you have chosen. “You must have a license, liability insurance, and at least two years of house building experience,” says Duncan. You must receive a guarantee for the new building from the client
Finally, any funds remaining after construction begins must be deposited directly into your loan capital. You cannot get cashback from this type of loan.
VA construction lender
Note: It can be difficult to find VA home construction loans or lenders that offer these loans.
“Many lenders offer standard VA home loans for those buying existing homes. But VA construction loans are less available, ”warns Aragon.
"In addition, the VA has traditionally provided limited guidance on its home loans, which translates into widespread uncertainty and lack of familiarity with lender policies and requirements," she continues.
The good news is that you can search for VA approved lenders on the VA website. However, not all VA lenders offer VA construction loans. So be ready to contact multiple companies until you find one that does.
VA construction loan interest rates
Another caveat is that you are likely to pay a higher interest rate on a VA home loan than you would on a standard VA mortgage loan.
"That's because the participating lenders see home loans as a slightly greater risk," explains Aragon.
Home loan interest rates are usually at least 1% higher than standard mortgage rates.
“Unlike a mortgage loan for an existing home, there is no finished property to serve as collateral. So expect the interest rate to be a bit higher – usually 1% higher or higher, although the rate you quote may vary. "
Another reason your rate may be higher? "Long-term fixed interest rates are required, which can lead to a higher interest rate," says Holtz.
Other mortgage lending options
If you don't qualify for a VA home loan or can't find a participating lender, you're out of luck. There are other funding options that you can pursue for your new home.
For example, you could get a separate home loan to buy the property and a traditional home loan to pay for the construction costs, followed by a separate VA home loan to fund the permanent finished home.
"The downside to this approach is that you have separate underwriting, appraisals, closings, and fees, and your non-VA home loan will likely require a down payment," says Duncan.
Or, you can get an FHA permanent construction loan, which combines the purchase of the land, construction costs, and permanent mortgage financing for the completed home into one loan with a valuation and a single close. However, you will likely need to cut at least 3.5% to 10% and pay for private mortgage insurance upfront and annually.
If you choose a USDA approved rural area to build your own home, you may be eligible for a USDA loan for the construction of a permanent building. These also do not require a down payment and combine the purchase of the property, construction costs and the permanent mortgage loan into one loan product.
Instead of building a new home, home buyers might consider purchasing a fixer upper.
You could pay for the home and rehab with a VA home renovation loan or another home improvement loan.
Check your eligibility for construction loans (April 20, 2021)
Bottom line: review all of your options
Whichever route you choose, make sure you explore all of your options.
While building loans can be a little trickier, you still want to shop around and make sure you are getting the best type of loan and interest rate that are available to you.
Check your new tariff (April 20, 2021)