When someone is eligible for a VA home loan, they’re one of the select few fortunate enough to qualify. This is a special loan program that is earned through service to our country and helps veterans and active duty personnel as well buy a home with no money down, restricted closing costs, competitive rates and no monthly mortgage insurance. On the loan application there is an area where the borrowers check the appropriate box regarding the type of mortgage being applied for. It is here where the borrowers check “VA Loan.” Yet the lender needs more documentation the borrower is eligible for the VA home loan that just checking off a box. Instead, the lender relies on the borrower’s Certificate of Eligibility.
The veteran can request this eligibility directly from the VA but it’s much more convenient to have a VA approved lender make the request on behalf of the applicant. In this fashion, the certificate arrives electronically in a matter of moments and doesn’t rely on mailing or faxing the requested documentation. Once the certificate is received and reviewed, you will see both the amount of entitlement available as well as what the loan can be used for. If you look closely you can see the entitlement amount can be used to finance the construction of a property. But you’ll be hard pressed to find any VA approved lender to finance the construction of a home with a VA loan.
VA loans are issued in one lump sum- a permanent mortgage. Construction loans are issued in phases as the construction of the home progresses. For example, the builder clears the lot and prepares for the foundation work. Once that has been completed, the builder will request a certain percentage of the cost of the work done. Now say the builder lays pipe and pours the foundation. At this stage the builder would ask for another round of funds to be paid. All work and all payment periods are laid out in the contract and managed by a fund controller. Once the work has been completed and the construction loan fully funded, the construction lender wants its money back. During the construction period as funds are distributed, interest accrues. Borrowers typically make interest payments during construction but some construction loans allow for interest to accrue.
When construction is complete, the borrowers replace the construction loan with permanent financing. It is here where the VA loan can be used. During construction, borrowers also apply for a VA home loan. The VA loan is documented like most any mortgage and also includes the certificate of eligibilty. Upon the final draw of the construction funds are issued, an inspector is called to visit the property and make one final inspection and determine the property is eligible for occupancy. The VA lender contacts the construction lender and obtains a payoff amount which the VA loan will replace.