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Financing a new home with a VA loan

Jan. 27, 2014 - 11:36AM   |  
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Sometimes there’s just a special feeling of buying something brand new. There’s no previous owner, it’s all yours. When it comes to real estate, being the first owner carries a unique attraction for many. Others however, enjoy living in a more established neighborhood and the age of the property is not an issue. But for those who do want to buy new, can you use the VA home loan to finance the transaction?

Construction Loans and the VA

When eligible VA borrowers first obtain their certificate of eligibility, there is quite a bit more than meets the eye. The certificate of eligibility is the document that validates the borrower’s eligibility but how much entitlement remains if any. When borrowers use a VA home loan more than once to buy a home, there is the possibility that there will be very little, if any, entitlement remaining if the previous VA loan is still outstanding. VA lenders rely on this certificate when evaluating a VA loan request.

The certificate of entitlement contains the borrower’s name and social security number along with additional identification data and the entitlement amount. But besides the entitlement amount, the certificate also mentions the types of property the VA loan can be used for including a single family home, a condominium and for new construction. It’s all in the fine print, but it’s there.

However, you’ll be hard-pressed to find a lender that will approve a VA loan request for a construction, regardless of what the certificate of entitlement states. A construction loan operates much differently than a regular or “permanent” mortgage. A construction loan is issued in phases as the property is being completed and the funds are distributed to the builder in stages. VA loans are not structured in that manner.

Buying the Original

However, you can use a VA loan to buy and finance a newly built home. When you buy a new home, you can either buy from a builder who will build a custom home for you or buy a home in a brand new subdivision.

If you buy a custom home, it’s up to the builder how to proceed. Some builders have their own lines of credit at their bank and can access those funds as they’re needed when building the property. In this method, you will present your building plans and specifications to the builder who will calculate a cost to construct.

Say that your architect has completed your building plans. The builder will then add up all the costs associated with building the home from the ground up. Most often the buyers will own the lot that the home will be built upon but if not, the cost will include the purchase of the lot as well.

The transaction is negotiated completely between you and the builder but note that the lot may be a sticking point with many and if you don’t currently own the land where you wish to build, the builder may require that you purchase the lot separately. If you go this route, you’ll need to pay cash for the lot or obtain a short term lot loan from a bank.

Buying in the Subdivision

If you don’t buy a custom home, your other option is to buy a property in a new subdivision. When visiting a new project, you’ll visit the onsite sales office and pick out the floor plan that best suits your needs. You will also be shown a series of upgrades that will be included in your home such as granite countertops, master baths or custom flooring for example.

Once you decide on the home, the builder will ask for a deposit as well as ask for a copy of your preapproval letter from your VA lender. Once provided, the builder will start on your brand new home.

During the construction process, the developer is using its own funds to build the home using a line of credit at their bank. Once the home is completed, you will have a final walk-through to make sure the home meets your standards and is also inspected to certify that the home is ready for occupancy. When you go to your closing, your VA lender will provide the required mortgage amount to pay the builder and finance your new home.

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