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VA Loans for Custom Homes 101

Published September 4, 2009
2 min read

In the aftermath of a housing market collapse, lenders are more wary about issuing VA loans for the construction of a new home.

It is possible to finance building a home with a VA loan, but the challenge is finding a VA-approved lender willing to issue a construction loan. Know that the VA does not issue loans, it just insures up to a certain amount to reduce lenders’ risk.

However, there’s a hesitance for lenders to go forward with construction VA loans. Service members and veterans may need to go to local lenders or builders for a construction loan. When construction is complete, the short-term construction loan can be refinanced into a VA loan for qualified borrowers.

Short-Term Construction Loans

On construction loans, VA lenders would be taking on the initial construction costs, thus taking on more risk. Since that’s uncommon now, alternatives for construction loans may be limited to local home builders and lending entities. Unfortunately, borrowers may need to make a down payment to secure a construction loan.

It’s the military borrower’s bonus to find the best deal on a construction loan. Never skimp on research and ask questions about deals or better loan terms for military members and veterans. Don’t forget to look for testimonials and reviews of potential lenders, too.

Few, if any, VA lenders are still willing to perform true VA construction loans. In those cases, the lender pays the builder while the construction is in progress. This practice seems to be almost extinct, but it’s not outside the realm of possibilities.

Turning Construction Loans to VA Purchase Loans

Plenty of lenders will take a borrower’s short-term construction loan and make it a VA home purchase or refinance loan. Lenders can have different guidelines and requirements regarding how they handle these transactions.

Lenders require a few things of the builders, too, such as a one-year warranty on the construction and a current VA builder ID. Because of these demands from lenders, it’s a good idea to first talk with a VA-approved lender about what’s needed for the permanent financing before you find a local lender for a construction loan.

If you’re seeking a VA construction loan, prepare for a rigorous hunt as few lenders have interest in light of the recent housing market implosion. But there’s still opportunities to build a home through a VA loan, mainly be starting with a construction loan and turning into a permanent VA loan.

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