Many will tell you that the VA does not have a construction loan program. You can buy a new existing home with a VA Purchase loan, but you can’t hire a builder and pay them draws with a VA Construction Loan. This is not true. I refer any disbelievers to Chapter 7.2 of the VA Manual (google it).
The VA allows 100% financing on a home to be built, just like their purchase program. The qualifying guidelines are the same as a VA purchase loan, although some lenders do have some “overlays”. They work, for the most part, just like their Conventional and FHA counterparts (yes, there is an FHA Construction to Perm program!). The builder goes out and does a certain amount of work and they get paid for that work. They do not have to build the entire home before they get paid, as they would on a purchase loan.
The biggest difference between a VA CTP loan, and a Conventional one, is how the interest payments during construction are handled. On a Conventional CTP loan the borrower does not make full mortgage payments during construction of the home. That would not be fair since the borrower has not lent out all the money. Instead the borrower makes monthly interest only payments that are based on the balance of the loan during the month that bill is being sent. While these interest only bills can be relatively small in the beginning, they will only get bigger as draws are made. Eventually they are almost equal to full payments on the loan.
If a borrower is 30 days or more late on these payments, they must requalify for the loan. Given they have a 30 day late payment on a mortgage, many do not requalify and the home can go into foreclosure. Many VA borrowers do not have a lot of cash reserves, and already have a monthly payment for shelter. The VA is concerned about these Vets falling behind on interest only payments. So they state in the VA guidelines that the Builder, not the borrower, should pay the interest during construction and all the construction loan related fees (the VA borrower is still responsible for the fees they would have on a purchase loan).
Of course if you have been speaking to a builder and negotiating a price on the home, the builder wasn’t planning on paying any of these fees. So you will have to negotiate with the builder on how this will be handled. My many years of experience tells me the builder isn’t just going to pay these fees out of the goodness of their heart. A good loan officer will work with you to calculate these fees (most lenders give us spreadsheets to do this) and the builder is allowed to roll these fees into the contract to build the home. When we close on the loan the lender will pull these fees out of the loan balance and put the funds into an escrow account. When the bills come due, they will be paid out of the escrow account. This way the borrower has no payments until the home is completed and they can move in. The builder doesn’t have any payment because the fees were rolled into the cost to build and drawn out by the lender.
It is important to note that this is something that must be negotiated with the builder, they are not under any obligation to work with this program. If you have questions please feel free to call me at 586-917-5534, email me at jerrythomas1958@gmail.com or visit my website at bestfhaconstructionloan.com.
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