Written by Isaac F. Davis

A VA loan can be a great mortgage option when buying an existing home. But, what about building a new home — is the VA Home Loan Guaranty Program still a good choice? 

Many deserving Veterans, like their civilian counterparts, aspire to build their dream homes.  Qualifying for a VA mortgage for a custom home is almost like qualifying for a VA loan for purchasing an existing home.  Entitlement, credit and income qualifying, and VA funding fees all come into play. But, there are distinctions that should be mentioned.

The first thing a VA borrower should know when considering a VA loan to build a new home is that only builders possessing a valid VA builder ID number can build new homes financed with a VA mortgage.  The VA builder ID number is used to identify contractors who have successfully registered with the U.S. Department of Veterans Affairs.

Next, a VA home loan must be closed before construction can begin. At closing, written permission from the VA borrower is given to pay out the portion of the loan that is designated for construction. The remainder of the loan is put into an escrow account. 

Typically, VA loans require payment within 30 days after closing.  With a VA loan for construction, the borrower won’t need to make an actual mortgage payment on the loan the house is ready for occupancy.  In fact, an initial payment can be scheduled for up to a year after closing in order to allow builders enough time to finish construction.  It’s important to note that if construction takes the full year, and the first payment is indeed delayed for 12 months, the borrower would have 29 years to pay off the 30-year loan. Therefore, payments on a 29-year mortgage will be a little higher than those of a 30-year mortgage. 

Though the borrower doesn’t need to make payments on a VA loan for new construction, the builder does.  From the time the VA home loan is made to the time a certificate of occupancy is issued, it’s the builder’s responsibility to make monthly interest payments. This helps motivate the builder to complete construction on time. 

In addition to completing construction on time, the builder is obligated to pay any fees associated with construction. In fact, VA guidelines prevent the borrower from paying such fees. A VA-approved builder must also carry his own hazard insurance and pay for title-update fees.

VA borrowers who wish to use their home loan entitlements on a custom construction must know that the funding fee associated with all VA home loans is expected to be paid 15 days after closing or before. The funding fee varies depending on whether the borrower is a Reservist/National Guard member or a regular active duty military member.  The U.S. Department of Veterans Affairs requires that all VA loans be assessed the funding fee, which may be waived for certain disabled veterans and surviving spouses. 

To find out more about using a VA mortgage for new construction, ask your VA loan professional.