VA One-Time Close – Construction Loans: What to Know Before You Build

I've already highlighted the benefits of using the VA home loan program. The next possible challenge would be that your dream home doesn't exist yet. Maybe you've found your slice of heaven and it just needs to be built or possibly you like the idea of a brand new home for lower maintenance costs in the near term. The VA has already thought about this and offers the One-Time Close (aka OTC) product.

The VA OTC allows a Veteran to finance the construction of a new home and the post-construction mortgage with one closing. Rather than closing on 2 separate loans, ground-up construction and then regular VA home loan once the home is finished, the VA OTC knocks both out in one set of paperwork.

Lenders establish the long-term mortgage before construction begins. The construction loan operates on a draw schedule as the builder makes progress completing the home. Once construction is completed, the loan converts to a long-term mortgage payment schedule.

This matters because the Veteran is seeking only 1 loan approval with 1 set of closing costs and concerns about interest rate movement during construction. It also removes the uncertainty of the home appraising and qualifying for financing once finished because the home was built to the preapproved plan.

Possibly the largest consideration is your choice of builder. The lender not only qualifies the borrower, but also the builder and the project. Builders must be registered with the VA; if yours isn't, most lenders can walk them through the process. Make sure your builder is ready to work within the lender's and VA's construction requirements. The lender will review the plans, contracts, including subcontractors, permits, budget, required inspections, and the draw schedule as part of the approval process.

Requirements to use a VA OTC

• Must be an eligible VA borrower with sufficient remaining entitlement on their COE
• Must qualify with credit, debt-to-income (DTI) considerations, assets and reserves
• Must be your primary home
• Lender-specific requirements may also apply

Benefits of using the VA OTC

• Can include purchase of the raw land or if the Veteran already owns the land
• Can potentially build a new home for $0 down payment – subject to your borrower profile as viewed by: project cost, DTI, credit, and general ability to repay the loan
  • VA funding fee applies (2.15% first use, 3.30% subsequent use; exempt with a qualifying VA disability rating)
• Rate is locked before construction begins; no risk of rising rates during the build

When does it not make sense to use the VA OTC?

• If you need to move into a home soon. Construction typically runs 9–18 months from closing to move-in.
• You can already see a similar home for significantly less.
• Construction budget is too tight. The home should be more than just "livable," this should be a great spot that is complete in your eyes on the day you move in. If you have to make cuts before building, it is going to be difficult to be happy when the project is complete.
• You want more ability to adjust the plans during construction. Lender review and approval is required and that can not only take time and hold up the entire construction, but it is subject to not being approved, especially not repeated requests.
• The builder is not fully committed to meeting lender requirements. Don't risk your future home and loan success by entertaining a builder who thinks they can "work around government or lender requirements."
• Your VA COE does not have sufficient entitlement remaining.
  • Let's talk about getting your entitlement restored by refinancing any other property out of a VA loan.

Bottom line

The VA OTC remains a powerful option for Veterans who want to build and not buy. Combining 2 processes into 1 saves on costs and can potentially be done with $0 down; that's a strong combination.