Veteran Home Loan Program Allows $0 Down on New Construction

Data released from the Department of Veteran’s Affairs for their fiscal 3^rd quarter of 2020 showed the number of VA home purchase loans that were guaranteed at 106,087, an increase of +7.34% from the 3^rd quarter of 2019 which showed 98,833 home purchase loans guaranteed.

Military service members are eligible to apply for a VA loan guaranty after they have actively served for 90 consecutive days during wartime or served 181 days during peacetime.  Surviving spouses of a member who died in service or a service-connected disability and have not remarried may also be eligible.

Most veterans are more concerned about their educational, health, and dental benefits than they are about their eligibility status for homeownership.

When it comes around to utilizing their home loan benefit, they think about purchasing an already built new home or resale.  But very few know that they can build a brand new home with a builder and design it from scratch on a lot for either a stick-built, modular or manufactured home and finance the construction and home with one single VA loan.

“VA Approved Lenders underwrite the files in-house utilizing their VA Automatic status,” says Roger McKnight, President of National Capital Funding, LTD. (NCF), a Construction Funds Administration Service company located in Houston, TX. NCF has administered the funding for 3,700+ One-Time Close FHA/VA/USDA construction to permanent loans for residential mortgage lenders in its 18-year existence.  “The underwriting is no different than regular VA loans except for a “Subject-To” appraisal and a few extra documents placed in the file.  There is no requalification of the borrower or recertification of the property value upon completion of the home. Mortgage payments do not begin until the construction is complete.”

The Department of Veterans Affairs recently revised and expanded a section of the VA Lenders’ Handbook to include additional guidance for VA construction loans. The VA One Time Close loan allows qualified borrowers to finance both the construction (including the land) and the permanent loan for the home itself (the mortgage) at the same time.  Criteria for VA financing also include meeting loan guidelines for credit and income eligibility where borrowers can finance 100 percent of their home purchase.

Not only is there no down payment requirement, but eligible veterans do not pay mortgage insurance.  They do, however, pay a VA funding fee.  For $0 down loans, the first time use fee is 2.3% of the loan amount and for subsequent use, the fee is 3.6%. The funding fee can be rolled into the loan amount, and larger down payments allow for lower funding fee amounts.  The funding fee is waived for all Veterans who were injured while in service and receive disability compensation or have a disability rating of 10% or more.

Bruce Reichstein, a former Bank Chairman and current President of Warehouseline.com, a Houston based company that specializes in FHA/VA/USDA One-Time Construction Close warehouse lending says, “Finding an experienced mortgage lender for this type of VA financing is not an easy task.  Most VA lenders concentrate on regular VA home purchases, VA cash-out refinances, and streamline refinances.   Only a select few companies around the Nation employ loan officers who fully understand how to put these deals together and provide quality service throughout the process.

If a Veteran is serious about purchasing a lot, finding a local builder, and has the passion for moving forward with the various steps necessary to get this type of loan, then the least I can do is point them in the right direction.  As an accredited VA Automatic Underwriter with the Department of Veteran’s Affairs since 2002, I get personal satisfaction in helping our Service Members figure out how to utilize their hard-earned VA Home Eligibility and ultimately move their families into a newly constructed home.”

How Does It Work

The lender will make a single close construction to permanent loan which is composed of two phases – the construction phase and the permanent phase.

The lender funds the minimum required for closing (land purchase or payoff, fees, etc.). On the fourth business day after funding, the Warehouse Lender reimburses the lender the amount that was funded from the loan, thereby purchasing the loan. The Warehouse Lender owns the loan by assignment during the construction phase which begins as of the loan closing and continues until the borrower’s home has been completed.

As construction progresses, NCF administers One-Time Close Loan funding needs on behalf of the Warehouse Lender. When additional funds are required for draws to the builder, NCF notifies the Warehouse Lender which wires the funds to the title company for disbursement to the building contractor. Once the home is fully constructed, NCF notifies the lender and provides all construction documentation required by the VA. Upon completion of construction, a loan modification is prepared and signed by the borrower to convert the loan into its permanent phase.

Upon review and acceptance of the completion of construction documentation, the lender funds the full amount of the note to the title company. By funding the loan, the lender reacquires all rights, title, and interest in the OTC Loan from the Warehouse Lender. NCF instructs the title to pay off the Warehouse Lender and disburse the builder’s final draw. The modification agreement is signed by the lender and sent for recording.

Following modification of the OTC Loan, the borrower begins paying regular principal and interest payments to the lender as required under the loan documents.  At this point, the lender can keep the loan on its books or sell the loan to an investor.

Loans for veterans typically have interest rates comparable to conventional loan rates.  The VA eliminated maximum lending limits in 2020, which means that Veterans can build new homes that exceed the FHA and Conforming lending limits currently available in their county.  They still must have good credit and qualify for the home according to debt to income ratio’s set by the VA.  Most One-Time Close lenders will go up to $750,000 and review higher loan amounts on a case by case basis.

“The ability to build a brand-new house with higher lending limits and no down payment is of great benefit to our Veterans,” says Reichstein.  If eligible Veterans are interested in finding out more about the product and being contacted by one licensed lender familiar with their area, they can view this VA One-Time Close Construction to Permanent Loan information which includes a short video, and can send their requests to [email protected].

The site provides information and connects consumers to qualified VA One-Time Close lenders to raise awareness about this loan product and to help consumers receive higher quality service. They are not paid for endorsing or recommending the lenders or loan originators and do not otherwise benefit from doing so.  All information is treated confidentially.