What you need to know

Aligned Mortgage is pleased to announce that it now offers Veterans and active-duty servicemembers the opportunity to build the dream of homeownership from the ground up.

Most people aren’t as familiar with construction loans as more traditional types since the typical homebuyer is looking at properties that are already built. But if you’re interested in building a house and have questions about how your VA Loan can help, you’ve come to the right place because we’ve got answers.

What exactly is a construction loan?

In the simplest terms, a construction loan is a short-term loan that covers the cost of building a custom home from the ground up. Note that the loan is closed before construction begins.

How many types of construction loans are there?

There are two main types:

1. One-time, single close loan, also known as a construction-to-permanent loan, is used to close both the construction loan and permanent financing simultaneously. As a bonus with the one-time construction loan, you only have to do the paperwork and pay closing costs once because the loan automatically rolls over into a permanent loan for the remainder of the term.

1. A two-time close or construction-only loan usually involves an initial loan closing before the start of construction. Then, once the house is completed, the borrower takes out a new (permanent) loan to pay off the construction loan balance. In this case, the borrower must qualify for the second loan as they did the first, and they will have to attend two closings.

Does Aligned Mortgage offer both types of construction loans?

Currently, Aligned Mortgage offers a two-time close, which means that the interim financing – or actual construction loan – is a conventional loan, but the permanent financing – or final loan – can be a VA Loan.

How are construction loan funds disbursed?

Unlike a traditional VA Home Loan, where the borrower receives the total loan amount to buy a property that’s already built, a construction loan proceeds in installments or draws, also known as a Loan in Process (LIP) account. This means that the lender disburses money on the part of the house that’s completed. For instance, once the foundation is completed and an inspector signs off, that contractor is paid. Loan funds are kept in escrow during the project’s construction phase and disbursed to purchase materials and pay contractors once the work is completed properly and invoiced. The borrower is never allowed unrestricted access or use of these loan funds. They can only be used for approved payments on the construction project and other mortgage-related needs.

By the way, a lot is going on during home construction, so make sure to communicate with your builder. An inspector confirms the completion of each stage of construction and ensures that the work was performed correctly. The inspector then approves draw payments to the builder. It’s essential to confirm with your builder to ensure those payments are made. You want the process and the schedule to run smoothly.

Can I also finance the lot I want to build on with a construction loan?

You might be able to finance the land or lot purchase along with the home’s construction with a construction loan. And in some cases, you can roll in and finance your closing costs. Generally, unless the price is higher than the appraised value, you shouldn’t have to provide a down payment. Your lender will be able to advise you about your particular situation.

What are the steps to getting a construction loan?

The construction loan process is not unlike what you would go through with a regular VA Home Loan, with the addition of a few extra steps.

• Confirm VA Loan eligibility. For instance, as with any VA Loan, you’ll need a Certificate of Eligibility (COE) from the VA.

• Get approved for a VA Home Loan. At Aligned Mortgage, we offer construction loans, and you’ll need to meet VA guidelines and minimum mortgage requirements that include:

• Credit score. There’s no VA-set minimum, but APM has a minimum requirement of 680 for the interim construction loan.
• Debt-to-income ratio (DTI). Your DTI, or total monthly debt divided by gross monthly income, shouldn’t exceed 41 percent. You may be approved with a higher DTI ratio if you meet the residual income requirement.
• Residual income. Simply put, your residual income is the money left over after you’ve paid all of your expenses. Note that the VA’s minimum residual income is considered a guide and is not used alone to approve or reject a VA Loan.
• Occupancy. The home must be a primary residence.

• Submit construction plans and specs. The new home must meet minimum property requirements set by the VA. Your builder will fill out appropriate forms that include a description of all building materials and submit them with a copy of the building plans for approval.

• All general contractors must be registered VA builders. The VA doesn’t care who builds your house as long as they are registered with the VA and have a VA Builder ID number. So, when you select your builder, ask them to register with the VA. 

• Get a VA home appraisal. And as long as the value is equal to or higher than the cost to build, you shouldn’t need a down payment.

• Get VA property certification. The VA inspector must sign off on the property confirming that it meets VA minimum property requirements and local building code guidelines.

• Provide the VA with proof of warranties after construction. The VA requires a one-year builder warranty or a ten-year insured protection plan for approval.

• If you have a one-time construction loan, the permanent loan payment schedule will begin automatically when the home is officially completed. The payment is based on the entire balance of the loan. With a two-time close, you’ll replace the construction loan with a new mortgage.

Please don’t hesitate to contact a loan officer at Aligned Mortgage with any questions you have about building your dream home. Our team members are always happy to familiarize you with guidelines and requirements regarding our loan packages.