VA construction loans offer a fantastic opportunity for eligible veterans and active military members to build a home with favorable financing terms. However, while these loans come with significant benefits such as no down payment and competitive interest rates it’s essential to understand the fees involved in the process. Here’s a breakdown of the common fees associated with VA construction loans.
VA Funding Fee
The VA funding fee is a one-time charge that helps sustain the VA loan program. The amount varies based on factors such as the borrower’s military status and whether they’ve used a VA loan before. For first-time users, the funding fee is typically 2.15% of the loan amount for regular military members and 2.4% for National Guard and Reservists. If a borrower has previously used a VA loan, the fee increases slightly.
Exemptions: Veterans with service-connected disabilities, surviving spouses of veterans who died in service and some other categories may be exempt from paying the funding fee.
Construction Fees
Since VA construction loans involve building a home from the ground up, various construction-related fees may apply, including:
- Builder’s Fees: Covers the cost of labor, materials, and construction services.
- Inspection Fees: Periodic inspections are required during construction to ensure compliance with VA standards.
- Permit Fees: Local governments require permits before construction begins.
- Engineering and Architectural Fees: If custom plans or structural work is needed, these fees may apply.
Loan Origination Fee
Lenders may charge an origination fee, typically 1% of the loan amount, to cover administrative costs. Some lenders may waive or reduce this fee, but it’s important to check before proceeding with the loan.
Appraisal Fee
A VA appraisal is mandatory to confirm that the home meets VA standards and is valued appropriately. Appraisal costs typically range from $500 to $1,000, depending on location and property size.
Closing Costs
VA loans limit the type and amount of closing costs veterans can pay. However, some common allowable closing costs include:
- Title Insurance and Title Search Fees: Protects the lender and borrower from ownership disputes.
- Recording Fees: Charged by local government offices to document the new property title.
- Discount Points: Optional fees that borrowers can pay to reduce their interest rate.
- Credit Report Fee: Covers the cost of pulling the borrower’s credit history.
Contingency Reserve Fund
Some lenders require a contingency reserve fund, usually 5-10% of the loan amount, to cover unexpected construction costs. If the fund isn’t used, it may be applied toward the loan principal or refunded to the borrower.
Interest Payments during Construction
Unlike a standard VA purchase loan, a VA construction loan often requires interest-only payments during the building phase. The borrower may need to cover these payments out-of-pocket or through a designated escrow account.
Conclusion
While VA construction loans provide an excellent path to homeownership with favorable terms, understanding the associated fees is crucial for financial planning. Veterans should work with VA-approved lenders to ensure transparency and explore options to minimize out-of-pocket costs. If you’re considering a VA construction loan, compare different lenders to find the best deal and ensure you fully understand the associated fees before moving forward.
For more information on VA construction loans, eligibility, and fee exemptions, consult with an experienced VA lender or visit the U.S. Department of Veterans Affairs website.
Blog received on email
