VA vs. Conventional Loan
Even though your certificate of eligibility plainly states the entitlement is good for new construction, there really aren’t very many approved VA lenders that offer such a program. There are several reasons why mortgage companies don’t offer construction loans of any type, including a VA version but the primary reason might be the logistics of it all. Construction loans aren’t doled out in one lump sum to the builder. Anyone can see where that might lead.
Instead, funds to build a home are distributed to the builder in phases as construction moves along. The builder reaches a certain milestone, such as finishing out the plumbing and electrical and the construction lender sends an inspector to the job site and verifies that yes, the plumbing and electrical have been completed and another round of funds are disbursed. A mortgage company may not have the facilities or even lines of credit to manage a construction loan.
But, let’s say that you do find a VA lender who will issue a VA construction loan. Construction loans typically require a 20 percent down payment at the outset and most often that down payment is in the form of equity as the veteran already owns the lot. The lot value typically fulfills the 20 percent equity position required. Yet if there is a 20 percent equity position based upon the value of the existing land then a VA loan is probably not your best bet, anyway. Why?
Because with few exceptions, all VA loans require a funding fee. For first time use, the funding fee is 2.15 percent of the loan amount, or $5,375 on a $250,000 sale. The funding fee is collected on VA loans to finance the home loan guarantee that VA loans have. The fee doesn’t have to come out of the veteran’s pocket as you can roll it into the loan amount. With a 20 percent down payment, a conventional loan might be a better choice as there is no such thing as a funding fee for conventional mortgages. If you ever find a VA lender who does VA construction loans and the construction loan needs a 20 percent down payment, go conventional.
|VA loan||Conventional loan|
|Property type||Financing for a primary home only||Financing for a primary residence, second home or investment property|
|Down payment||No down payment||Some programs offer down payments as low as 3% or even lower|
|Fees||Has upfront funding fee, which can be as low as 1.25% of the loan amount to as much as 3.3% (plus any fees are charged by the lender)||No funding fee (but lender fees still may apply)|
|Mortgage insurance||No mortgage insurance||With a down payment lower than 20%, private mortgage insurance is usually required|
|Credit score||No credit score requirement; however, lenders commonly look for borrowers with at least a 620 FICO. Average FICO score on loans closed in 2016 was 707.||Credit score of 620 or higher is usually required, though this depends on the lender. Average FICO score on loans closed in 2016 was 753.|
|Debt ratio||Average 2016 debt ratio: 40%||Average 2016 debt ratio: 34%|
|Interest rates||Generally lower than on conventional loans||Tend to be higher than on VA loans|