Change Date

September 15, 2004, Change 4

·   This section has been changed to create subsection lettering.

·   Subsections e and f have been added back into this section.  The previous change to the handbook erroneously removed these sections.

a. The Basics

VA will guarantee a “construction/permanent home loan,” that is, a loan to finance the construction/purchase of a residence.  The loan is closed prior to the start of construction with proceeds disbursed to cover the cost of, or balance owed on, the land, and the balance into escrow.  The escrowed monies are paid out to the builder during construction. 

The lender must obtain written approval from the borrower before each draw payment is provided to the builder.

This section does not address other construction loans guaranteed by VA;

that is, those for the purchase of a residence newly constructed for the veteran by a builder who financed the construction from his or her own resources.

b. Amortization

The veteran begins making payments on a construction/permanent home loan only after construction is complete.  Therefore, the initial payment on principal may be postponed up to one year if necessary.  The loan must be amortized to achieve full repayment within its remaining term. 

Example:  If it takes six months to complete construction, the payment schedule for the veteran obtaining a 30-year mortgage must provide for full repayment of the loan in 29 years and six months.

Rather than requiring a balloon payment, it may be preferable to set up equal payments (beginning after construction is complete) which are large enough to repay the loan within the original maturity without a balloon payment.

VA’s amortization requirements that payments be approximately equal and principal be reduced at least once annually apply to construction loans.  (See section 9 of chapter 3.)  However, the final installment requirement is different.  The final installment may be for an amount that does not exceed 5% of the original principal amount of the loan.