VA Circular Letter Addresses Construction/Permanent Loan Requirements

The Veterans Benefits Administration of the Department of Veterans Affairs (VA) issued Circular 26-18-7 (Circular) addressing Construction/Permanent Home Loans and replacing Chapter 7, Topic 2 in the Lender’s Handbook.

Guidance regarding the procedures involved in processing construction loans has, up until the publication of this Circular, been sparse and kept many lenders from offering construction loans to veterans.  A few of the highlights contained in the Circular are:

• Both one-time close and two-time close construction loans are eligible and the process is detailed in the Circular.
• Transactions where a veteran has contracted to build will be considered a purchase regardless of the category shown on the closing disclosure unless otherwise stated in the Circular. Lenders need to order the case as a new construction and purchase in WebLGY.
• Transactions where the veteran is his or her own contractor and uses subcontractors may be considered a purchase, but there is a requirement for detail recordkeeping regarding labor and material costs. The case must be ordered as a new construction and purchase in WebLGY.
• Transactions where construction was completed and at least a year has passed as evidenced by specific documentation will be treated as a refinance. A new VA appraisal after the date of the Certificate of Occupancy is required, and should be ordered as a cash-out refinance in WebLGY.
• A general contractor must be a registered VA builder. The Circular also contains requirements concerning acquisition costs, change orders, escrows, fees and charges for which the builder and the veteran are responsible, when the loan guaranty is issued, the amount of housing and subsistence costs until occupancy, inspections, “ceiling-floor” interest rates, cash back to the borrower, loan amortization, maximum loan amount, contingency funds, and project management.