I’ve been lucky enough to be a Mortgage Loan Officer for 30 years now. While I’m happy to have any business that comes my way, I’ve specialized in construction lending almost from the beginning of my career.
As we came out of the housing crisis in 2010, the options for construction lending had shrunk dramatically. No more zero down for everyone, no more stated income, minimum credit scores had risen and maximum debt to income ratios were lower. All of a sudden, government construction loans, FHA and VA, became very important options to have.
From time to time I am asked by Veterans which construction program is best for them, Conventional or VA. There are a lot of factors to consider before answering this question, credit score/history, debt to income, needed loan amount and if the Veteran receives any VA Disability Income. It’s best for a loan officer to have a conversation with the Veteran before making a suggestion one way to another but let me try to come up with some suggestions.
To start with, the best, lowest closing cost, lowest rate, safest, program is a Single Close Conventional or Jumbo Construction loan with 20% or more down. You will need to have a “turn key”, fixed price contract, with an experienced, licensed and insured builder. To qualify you will need to have a minimum credit score of 680 or more and a debt to income of 43% to 47% or less to qualify for these programs.
Well, what if the Veteran doesn’t have 20% down/equity? Then the next key question is, does the Veteran borrower have a Disability rating/income from the VA? If the answer is yes, then the Veteran should get a VA Construction loan. With this rating/income the Veteran borrower will not have to pay the VA Funding Fee (the VA version of mortgage insurance). This funding fee can be up to 3.6% of the loan amount. With less than 20% down on a Conventional Construction loan the borrower must pay monthly mortgage insurance. So stick with the VA program in this situation.
If a Veteran has less than 20% but more than 5% down/equity, with no VA Disability rating/income, a Veteran should ask a loan officer for a Fee Sheet for both programs to compare what would be best for them. With a VA loan they will need to pay the VA Funding Fee which would be added to their loan amount. With a Conventional loan they will need to pay monthly mortgage insurance.
The VA Construction loan is no different than the purchase program regarding down payment. An eligible Veteran, and their spouse, can borrow up to 100% of the value of the project. The value is defined as the appraised value or the cost of the project, whichever is lower. The VA program does require the builder to register with the VA and be assigned a VA Builder number. The VA does not approve builders.
The VA program has a minimum credit score requirement as low as 620. It only requires a two-year waiting period from a bankruptcy or foreclosure, the wait for a conventional loan is four to seven years. The VA also allows for much higher debt to income ratios than a Conventional program. This can be a very important factor if you wish to stay in your current home while your new home is being built.
The VA program does require that payments during construction, and the construction loan fee, must be rolled into the contract to build. The number of payments is equal to the number of months the builder projects it will take to complete the project after closing of the loan. If the builder goes beyond the time they projected they will be held responsible for the additional payments. The Veteran borrower has no payments on this loan until the home is completed.
If the Veteran is planning to be an owner/builder then they would need to do a two-time close. This means they would need to secure a Construction Only loan and then refinance to their 30-Year mortgage. Construction loans are expensive and require up to a minimum of 20% down/equity. When you refinance you must completely requalify for the loan, including a new appraisal. In my opinion, two-close loans should be avoided if at all possible.
For more information please visit me at my website bestfhaconstructionloan.com or call me at 586-917-5534.