In an effort to overcome lenders’ reluctance to construction lending, the Department of Veterans Affairs has clarified its requirements on loans to finance home construction.
While VA already offers approved lenders the ability to originate new construction loans, many have skipped offering the product due to the lack of guidance.
So the agency has provided more details about its policies on financing new home construction — a move
it expects will expand lending to veterans.
The department discussed the construction loan procedures in Circular 26-18-7.
Two types of VA construction loans include a one-time close transaction and a two-step construction loan where an initial loan takes care of the construction and a permanent loan replaces the initial loan.
Whether the borrower hires a general contractor or acts as his or her own contractor, the transaction will be considered purchase financing. The exception would be when at least one year has elapsed since construction was completed, in which case the transaction will be considered a refinance. A new cashout appraisal will be required after the certificate of occupancy date.
VA financing can cover the building contract, the cost or value of the lot, reserves for interest or contingencies, and permits.
Builders must be registered with VA.
Change orders or upgrades made after the appraisal cannot be financed unless a new appraisal is ordered.
Escrows are required on construction transactions for seasonal items, and it’s the lender’s responsibility to ensure escrow items are completed.
A 2 percent fee can be charged on a construction loan as long as a majority of the loan proceeds are paid out during the construction process.
The maximum loan amount is the lesser of the VA’s reasonable value or acquisitions cost, plus up to $6,000 in energy efficiency improvements plus the VA funding fee.
The VA’s circular is rescinded April 1, 2020.
