Just picture it…..every room is exactly as you had envisioned. The smell of fresh paint, cut wood, and new carpet are everywhere. Your wife finally got her ultimate wish: the walk in closet complete with storage to accommodate her 326 pairs of shoes. As the man of the house, you have also decided to treat yourself right and build the ultimate man cave. Key features include: the largest big screen ever known, surround sound, and a custom mini fridge built into a plush lounge area. Brew is now within arms reach and Sundays will never be the same. Without a doubt, your family is the envy of the neighborhood. The Joneses are scrambling to regain their status quo. Life is good.
You finally decide to take the next step with your VA loan in order to make this dream a reality. You apply for construction financing, and realize your local bank is requiring you to put at least 20% down. What? How could this be? “I am a veteran and I have my certificate of eligibility!” you shout. “I have been told that I qualify for 100% financing!” “Show me the money!” Unfortunately, nobody is listening.
Building a new custom home these days is much more difficult than it used to be. With millions of homes IN foreclosure, and banks tightening their lending guidelines, we ponder the question: How can a person take advantage of their VA loan benefits and still get the closet space with the man cave?
In a VA loan transaction, BANKS LOAN THE MONEY, and the VA INSURES the transaction. Because the banks have the money, and are essentially taking the risk, they decide the terms and amount of risk they are willing to accept. In most cases, banks will error to the side of caution, and tend to be MORE conservative than VA loan guidelines. So when the bank says they need 20% down to build a new home, this is why.
In the following paragraphs, I will show you another tactic: How to win over the builder and use THEIR money and resources to build YOUR dream home! You will learn how to leverage your VA loan eligibility to secure the transaction and cash out the builder upon completion. It IS possible to get a new custom home with 100% financing. You just need to know how. Keep reading for the answer.
Understanding builder mentality- (The key to your success)
Builders are constantly on the hunt for new projects. And in many cases, builders start projects BEFORE locating a buyer. This very well known, and common practice, is called “spec. building” or “speculation.” It’s a risky proposition, and requires the builder to invest large amounts of time and money banking on the notion the home will eventually sell for a profit. As we now see from past experience, many builders lost big money, and some even went bankrupt when they got stuck with homes that wouldn’t sell. It’s a huge gamble for any builder. As a savvy buyer, your job is to align yourself with the builder and eliminate many of these risks associated with a new build. In doing so, your offer will be very attractive and the builder WILL WANT to do business with you.
Making an offer a builder can’t refuse.
- Approach the builder with your bank pre-approval in hand. This is a powerful first step and lets the builder know you mean business and qualify to buy the home. You may also want to give the builder the business card of your VA loan officer and even invite the builder to call the bank should they seek more information. After all, you have nothing to hide, and doing so sets you apart from other shoppers that waste time.
- Your next step is putting up a reasonable deposit for the new home. This will be something that both you and the builder agree is fair. Use your head and be smart. Your objective is putting up some cash to make your agreement binding but don’t stretch yourself too thin. Use the fact that your already qualified for financing as a reason to keep the down payment on the small side. Contact a realtor or real estate attorney to help you with these agreements.
- If you own the land free and clear, or have plenty of equity, you can use this as a bargaining chip to “sweeten the deal” and add security to the builder considering your proposition. Just remember, if you tie up the land, make sure you have expert legal advice on your side and understand the ramifications of your actions. If you fail to plan then plan to fail.
- Another topic for negotiation is paying the interest that accrues during the construction of the home. Traditionally, the buyer is responsible to cover the interest payments during the construction period. I recommend offering to cover the accrued interest upfront in your negotiations. In doing so, you eliminate the only other objective many builders have by covering the loan payments while the home is under construction. If you enter an agreement to pay interest, double check the cost breakdown on the home and make sure your not being double billed. You may be able to LOWER the price of your home.
But I don’t have any land!
If you don’t have land, your quest for a custom built VA home just got easier! Bringing a builder to YOUR job site is always going to be more difficult than GOING TO the job site. So without the land issue standing in your way, just target the community you like, and then find the builder with projects already underway! Your approach with the builder will be identical to the process I described above. Create value and eliminate risk.
Target a home that is in the very early construction stages. Just after ground breaking is ideal. The sooner you locate a new home the better your chances for making custom changes. The builder may ask you to cover the costs for any design changes you make. Those costs may be architectural and engineering; but overall, paying for these changes will be much less than putting 20% down.
Once your home is about 60 days from completion, contact your VA lender to start the closing process.
PS. I think the man cave is ready.