VA Underwriting Guidelines
A VA mortgage can be used for purchase, construction, refinance, cash
out, rate term reduction, and energy efficient modifications. This
site will explain the guidelines for a VA loan proposed for those
VA Home Loan
A VA loan can be used to purchase, purchase and repair/improve, or construct a residence to be owned and occupied by the veteran as
their primary residence. The loan may include simultaneous purchase of the land on which the residence is situated or will be situated.
A VA mortgage may also be guaranteed for the construction of a residence on land already owned by the veteran.
A portion of the loan may be used to refinance a purchase money mortgage or sales contract for the purchase of the land, subject to reasonable value
requirements. The residential property may not consist of more than 4 family units and one business unit except in the case of certain joint loans.
A VA Loan may be used to purchase a one-family residential unit in a condominium housing development approved by VA.
may also be used for purchase, construction, repair, alteration, or improvement of a farm residence which is occupied by or will be occupied by the veteran as a home. The loan cannot
cover the nonresidential value of farm land in excess of the home-site,
the barn, silo, or other outbuilding necessary to the operation of the farm, or farm equipment or livestock.
A portion of the proceeds of a loan to construct a farm residence on encumbered land owned by the veteran may be used to pay the lien or liens on the land only if the reasonable value of the land is at least equal to the amount of the
lien(s). If the loan includes the purchase of farmland, the farmland is appraised at its residential value only.
Construction to Perm Basics
VA will guarantee a "construction/permanent home loan," that is a loan to finance the construction/purchase of a residence. The loan
must be 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.
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.
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.
Builder Must Pay
On a construction/permanent home loan, the builder is responsible for:
- Interest payments during the construction period
- All fees normally paid by a builder who obtains an interim construction loan including, but not limited to: inspection
fees, commitment fees, title update fees, and hazard insurance during construction.
Note: The veteran may not pay any fees which are the builder’s responsibility.
The permanent mortgage loan interest rate is established at closing. Lender’s may offer a “ceiling-floor” where the veteran “floats” the interest rate during construction. The agreement must provide that at lock-in, the permanent interest rate will not exceed a specific maximum interest rate yet also permit the borrower to lock-in at a lower rate based on market fluctuations.
Note: The borrower must qualify for the mortgage at the maximum rate.
Loan Proceeds Not Fully Disbursed
If construction is not fully completed and loan proceeds not fully disbursed, guaranty will apply only to the proper pro rata part of the loan. To calculate the proper pro rata part of the loan:
- Take loan proceeds disbursed for construction purposes.
- Add any other payments made to the builder by or on behalf of the veteran.
- Take the lesser of the above total or 80 percent of the value of that portion of the construction actually completed, and
- Add any loan disbursements made for the purchase of the land on which the construction is situated.
Ineligible Loan Purposes
VA cannot guarantee loans made for purposes other than those listed above.
Examples of ineligible loan purposes include:
- Purchase of unimproved land with the intent to improve it at some future date (that is, the land purchase is not in conjunction with a construction loan).
- Purchase or construction of a dwelling for investment purposes.
- Purchase or construction of a combined residential and business property,
unless the property is primarily for residential purposes, there is not more than one business unit, and the nonresidential area does not exceed 25 percent of the total floor area.
- Purchase of more than one separate residential unit or lot unless the veteran will occupy one unit and there is evidence
that the residential units are unavailable separately, the residential units have a common
owner, the residential units have been treated as one unit in the past, and the residential units are assessed as one unit, or ...
partition is not practical, as when one unit serves the others in some respect; for example, common approaches or
Secondary borrowing is acceptable as long as the veteran must not be placed in a substantially worse position than if the entire amount borrowed had been guaranteed by VA. and the requirements detailed below are met.
The lender must submit documentation disclosing the source, amount, and repayment terms of the second mortgage and agreement to such terms by the veteran and any co-obligors.
The second mortgage must be subordinated to the VA guaranteed loan, that is, the second mortgage must be in a junior lien position relative to the VA loan.
Proceeds of the second mortgage may be used for a variety of purposes, including but not limited
to closing costs, or a down payment to meet secondary market requirements of the lender.
They may not be used to cover any portion of a down payment required by VA to cover the excess of the purchase price over VA's reasonable value.
There can be no cash back to the veteran from the VA first mortgage or second mortgage obtained simultaneously.
The veteran must qualify for the second mortgage which is underwritten as an additional recurring monthly obligation.
The rate on the second mortgage may exceed the rate on the VA-guaranteed first, however, it may not exceed industry standards for second mortgages. "Rule of thumb" is that second mortgages are one or two percent above the market interest rates for first mortgages.