Look closely at a copy of your Certificate of Eligibility you’ll see lots of fine print underneath much larger print that clearly points out your available entitlement. The fine print points out some of the details of the eligibility including the types of properties that are eligible for financing including a home purchase, condominium loan and construction. But wait, construction? A veteran can use the home loan benefit to finance construction of a new home? Yes, the VA says its okay but you’re going to be hard pressed to find a lender to do one. In fact, it’s probably impossible. So why does the VA say it’s okay with them but banks still won’t make a VA construction loan?
It’s because of the way construction loans are issued and how they’re managed throughout the construction process up until the home is finally completed and a certificate of occupancy is signed. When a lender approves any ordinary construction loan, the value is based upon the home being completed. An appraiser takes a good look at plans and specs, the cost to build from the contractor and compares those figures with similarly priced homes in the area. Many construction loans are then approved at 80 percent of the as-completed value. For example, the soon to be build home will be worth $200,000 when complete so in this example the bank will loan 880 percent of that, or $160,000.
However, the bank won’t just hand the contractor a $160,000 check but instead assign various draw periods where the contractor is allowed to pull funds based upon certain parts of the construction being completed. At each draw request, the lender will inspect the job site, confirm the work was completed as reported then approve the next draw. This is repeated until the home is finally finished.
VA lenders can approve a VA loan but don’t have the mechanisms or even perhaps the tolerance for intermittent inspections, draws and lending based upon future value. Approve a VA loan to pay off a construction note? Sure. But a new construction loan? Hard to find.