When a Buyer gets a VA Loan they are not actually using the Veteran’s Administration as their lender. The Veteran’s Administration doesn’t make home loans, they just insure them. It is up to the veteran to find a lender that is VA approved. Buying an existing home is different than building a new home because when you build you need to get a construction loan from the lender. They are loaning on something that doesn’t exist, yet but won’t be able to exist without a loan to pay for the building of the home.
After the recent housing market collapse, which was caused in part by the boom in new construction, lenders have become more strict with their lending practices. In the few years before the collapse, lenders were giving loans to people with little down and allowing for interest only loans as well as other creative loans which was allowing buyers to obtain loans in amounts that were much higher than their income could support. Many builders as well as buyers built on speculation that they would be able to sell the homes that they built at a profit. When the market collapsed, many were left with new construction homes that they could not sell and loans that they could not pay.
Now it is harder to find lenders that will give construction loans and more difficult still to find VA approved lenders that also give construction loans. What is becoming more common today is for a veteran to initially secure a construction loan from a lending institution or even from a builder. When the home nears completion, the veteran can refinance the construction loan which is typically short term into a permanent VA loan.
The difficulties with following this path can include struggles with the down payment. VA loans can be procured with as little as zero percent down which can be a significant difference from the up to 20 that may be required by other lenders. Sometimes builders have programs for veterans and military families that help them get into homes for less money down. If a veteran can find a builder who programs or incentives for military buyers, it may help them get into a new construction home even if they have a problem finding a lender who does a ture construction loan where the lender pays the builder as the building progresses.
Once the building is completed, the buyer will procure a regular VA loan using the same process as someone who is obtaining a loan to buy an existing home. These loans may be handled as a refinance or as a new purchase depending onthe lender. It is important for the buyer to talk to a VA lender before starting the construction of the home even if they aren’t carrying the initial construction loan. The VA lender can pre-approve the buyer and help them with the process of getting the permanent loan. It would not be good to find out toward the end of the building process that you will not be able to convert your short term construction loan into a permanent VA loan.
If a buyer is able to find a lender that will handle a construction loan they will also need to make sure that the builder also has a valid VA builder ID during the construction process. They must also submit a one-year warranty on the home. Sometimes the buyer’s VA loan specialist can help them find an entity that will lend them a construction loan. They might even be able to help find on with better terms. This is another reason why it is wise to contact a VA lender before construction begins.
If it is so much trouble finding a builder and lender that can deal with new construction, why would it be beneficial to try and get VA financing instead of conventional or FHA?
One reason is that in most cases a buyer can get a no down payment loan from the VA. The buyer will not be FHA loan the buyer will have both an upfront and an annual mortgage insurance cost and with a conventional loan they will typically need to pay for private mortgage insurance unless they are putting 20 down.
VA loans typically have the lowest interest rates of all loan types. This can have a significant effect on the monthly mortgage payment as well the total amount paid on the life of the loan.
VA loans can be assumable, which means that someone can take over the loan if the buyer sells the house allowing the new buyer to benefit from the low interest rates on the loan. This would, of course, be subject to VA and/or lender approval, but if the owner is selling during a period of high interest rates being able to assume a low interest rate loan can make your home more attractive to buyers than others being sold around you.
The VA can help you get into a home but it will not guarantee the house itself to be free from defects. It is up to the buyer to hire a home inspector to check out the house and give the prospective buyers a list of possible problems. If the buyer has added an inspection contingency to their purchase agreement they will then have the ability to negotiate with the seller to either fix the problems, reduce the price or the buyer can walk away from the purchase without losing any earnest money that may have been paid.
The VA also cannot guarantee that the chosen home purchase is a good investment nor can it guarantee that a buyer can get out of it what they paid for it if they sell. This may be especially important to a buyer who is building a new home. With new construction, the buyer is allowed to choose their own finishes, flooring, paint etc. They can also choose to upgrade from the original plans. If a buyer chooses too many upgrades such as adding square footage, choosing expensive finishes, adding a fireplace, etc., they may “price themselves out of their neighborhood”. This means that their home will be the most expensive home in their neighborhood which might make it hard to get an appraisal at the price they would want to sell it for because the comparables that the appraiser would need won’t be there.
As in all home purchases, it will be the buyer’s responsibility to do their research to find the best options for them.