Deciphering the VA Lender’s Handbook Chapter 7 Part 7
In the previous article we went over some important information about construction loans, including amortization, the fees the borrower is allowed to pay, and the difficulty a borrower might have in finding a lender willing to offer a VA construction loan. In this article, we’ll be wrapping up the rest of the details about construction loans. We’ll be covering interest rate considerations in a construction loan, the VA funding fee in regards to construction loans, when to expect the LGC, and what happens when loan proceeds are not fully disbursed by the end of construction.
Though you may not think about it immediately, there are special considerations in regards to the interest rate on construction loans due to the period of construction in between loan closing and when payments on the loan start. The first thing to remember is that the permanent interest rate is established at closing. However, a lender may offer the borrower a “ceiling-floor” option that allows the veteran to float the interest rate throughout the construction period. The VA requires that a maximum interest rate be set by the lender and agreed to by the borrower and that the borrower can lock-in at a lower rate based on market fluctuations. Obviously, the set maximum rate must not bump the mortgage above what the borrower is qualified for.
In light of the special considerations for interest rates on construction loans, and also the difference in timing of the first mortgage payment on a construction loan, one might assume that the VA funding fee would also be due at a different time than normal. In fact, the funding fee must be paid to the VA within 15 days of loan closing. Paying the funding fee is not tied in any way to the beginning or completion of construction. Though the funding fee must be paid within 15 days of closing, the loan need not be reported to the VA until within 60 days of when the final compliance inspection report comes back. Since the lender takes care of loan reporting, you as the borrower shouldn’t need to worry too much about that.
On a normal VA loan, the Loan Guaranty Certificate (LGC) is issued at closing. On a construction loan, the process is a bit different. Even though the loan is considered guaranteed at closing, the LGC will not actually be issued until a clear final compliance inspection report has been received by the VA. The LGC is typically issued before the loan is reported to the VA. As a borrower, you should have a copy of the LGC for your loan. Likely you will never need it, but better safe than sorry.
The reason most VA-approved lenders are currently not offering construction loans is because they carry a fairly high risk with them. Especially in today’s market, the possibility that construction may have to be halted and not fully completed is high enough that most lenders have decided not to risk it. Since the VA cannot compel lenders to offer certain types of loans, this means that getting a construction loan may be very difficult for VA-eligible borrowers. In the event that you are able to get a construction loan, but the worst should happen and you are not able to complete the home, the lender is in a position to try and pick up the pieces.
In the event that construction on the home is not completed and the proceeds from the loan have not been fully paid out, the lender must calculate the amount of guaranty that they will be able to receive from the VA. Since this is directly related to the borrower’s entitlement amount available, this is good information for you to know. The lender takes the amount of the loan proceeds that has been disbursed, adds the value of any other payments made to the builder on behalf of the veteran, then takes the lesser of that amount or 80% of the value of the portion of construction actually completed and adds any amounts paid for the purchase of the land.
If you are interested in getting a VA construction loan, start looking for VA-approved lenders in your area and see if any of them offer construction loans.