VA Loan Articles
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VA Loans for Custom Homes 101
If you want to take out a VA home loan, there are a variety of options available to you. You can purchase an existing home, a brand new home, or you can choose to apply for a VA mortgage on a home that is yet to be built. VA loans for custom home construction are definitely available to qualified borrowers, but as with any first-time home purchase there are plenty of frequently asked questions.
- When is the VA loan approved?
- When do I start paying on my VA mortgage?
- Who is responsible for the loan and interest payments while the home is under construction?
- Who pays the builder's fees?
When the VA mortgage is approved for a custom home project, the loan is closed before construction begins. The portion of the VA loan required to cover the cost of construction are paid out (with written permission from the borrower) and the rest is put into an escrow account for use during the project as needed.
The good news about a VA home loan for a custom home is that the borrower doesn't make a single mortgage payment until the project is complete. According to the VA, initial payment can be delayed up to a full year. That may sound like a bargain to some, but it's important to know the term of your loan does not change. If you took a 30 year VA home loan, and construction of your house takes a full year, you'll be responsible for paying off the loan in 29 years from the date of the closing of the loan--not 30 years from the time you began making payments.
Some investment-savvy borrowers will take the amount of the payments they would be making during the construction period and invest the equivalent in an interest-bearing account, giving a bit extra to use when it comes time to start making those VA loan payments.
During the construction, the builder is responsible for any interest payments required on the VA mortgage during the construction project. VA regulations also forbid the buyer from paying any builder fees that would normally be paid by the construction company (when taking out an interim construction loan, according to VA regulations). You cannot be held responsible for the builder's hazard insurance, for example, or for title update fees.
It's important to budget for the VA loan funding fee, which is due no later than 15 days after the loan is closed. Unlike your first VA mortgage payment, the funding fee is not connected to the construction project. Ask your lender about the amount you should set aside for the funding fee.
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