Refinancing A Construction Loan With A VA Loan

Added June 26, 2009 by Samuel J. Tamkin

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Summary: Once you have started construction on a home and you have obtained a construction loan, the time comes when you must focus on obtaining permanent financing. Construction loans are short term loans. You'll need to refinance the construction loan with a standard loan. US Veterans have an additional choice when obtaining financing. They can obtain a Veteran's Administration loan or VA loan. While VA loans can be more expensive, VA loans can also be a great deal for those that may have lower credit scores or certain credit problems or want to obtain a larger mortgage on their home.

Q: I'm planning to build a home using a construction to permanent loan, and paying it with a Veteran’s Administration (VA) loan once construction is complete. I was hoping to get some advice on whether this is a good idea and is there a way to get my closing costs rolled into my VA loan?

A: If you’re able to obtain a construction loan on terms and pricing that is agreeable to you that would be great. Once you have that financing in place, you’ll need to replace the construction loan with a permanent loan when the home is completed. If you qualify for a VA loan, you should be set. However, you should do some additional shopping to make sure a VA loan is your best option.

First, you should compare rates and fees from various lenders. You may find that you might not get as much financing from a conventional lender as the VA, but the interest rate and fees might be less.

VA loans traditionally have allowed a lower down payment and whether the VA loan you obtain allows the fees to be rolled into the loan amount will depend on the appraisal of the home and the amount of your old loan.

You really should sit down with at least two lenders, including a VA lender. Many lenders are authorized to originate both conventional loans and VA loans. But I’d also like you to sit down with a credit union, if you belong to one or can join one, since credit unions often offer excellent mortgage programs

Also, be sure to talk to the lender who offers you the construction financing. It’s possible that lender may offer you a discount on your closing costs or the ease of a single closing that will make that lender’s permanent financing the best choice.

Just be sure you understand the terms of your construction loan, and all of the terms and fees associated with your permanent financing. Most important, be sure that you don’t build a house that’s worth a lot more than the homes your neighbors have. Even a so-called foolproof financing plan can’t help these days if the home doesn’t appraise out in value.

For additional information on VA loans, take a look at our previous story, Finding rates for VA loans.

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