source:
  type: guide
  id: va-m26-7-ch07-t02
  authority: VA Lenders Handbook (VA Pamphlet 26-7), Chapter 7, Topic 2 — Construction/Permanent
    Home Loans
  description: VA Lenders Handbook (VA Pamphlet 26-7), Chapter 7, Topic 2 — Construction/Permanent
    Home Loans.
  coverage_tier: operative
obligations:
- id: va-m26-7-ch07-t02-full
  canonical_id: va-m26-7-ch07-t02-full
  section: VA Lenders Handbook (VA Pamphlet 26-7), Chapter 7, Topic 2 — Construction/Permanent
    Home Loans
  type: do
  tags:
  - regulator-direct
  - va
  - va-handbook
  - corpus-expansion
  - tier-operative
  primary_source:
    tier: 1
    authority: VA Lenders Handbook (VA Pamphlet 26-7), Chapter 7, Topic 2 — Construction/Permanent
      Home Loans
    source_class: va-handbook
    source_url: https://www.benefits.va.gov/warms/pam26_7.asp
    snapshot_id: 0e2735cf8ca44400
    fetched_at: '2026-05-23T01:53:53Z'
    content_hash: sha256:74297ad4fadd5e592b5688f5567170f8c128f7c9749dd06edd59e735a69099d8
    paragraph_quote: '2. Construction/Permanent Home Loans Change Date March 11, 2019
      • This chapter has been revised in its entirety 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. The loan will not be guaranteed until construction
      is complete and all Notice of Value (NOV) conditions are met. 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. Lenders should have the specialized
      experience to originate, process, underwrite (borrower, project, and builder),
      close, service and administer such loans. These types of loans and projects
      inherently have uncertain elements that require careful examination. Continued
      on next page VA Pamphlet 26-7 Revised Chapter 7: Loans Requiring Special Underwriting,
      Guaranty, and Other Considerations 7-14 2. Construction/Permanent Home Loans,
      continued a. The Basics, continued Construction to Permanent (One Closing Vehicle)
      Construction to Permanent Purchase (Two Part Closing Vehicle) Refinance Construction
      Loans • Once loan vehicle is established it cannot be modified into a different
      loan vehicle • Can utilize bonus entitlement • See Chapter 10 of this Handbook
      for appraisal guidance • Loan closed before start of construction • Guarantee
      cannot be issued until construction is 100% complete • Once loan vehicle is
      established, it cannot be modified into a different loan vehicle • Can utilize
      bonus entitlement • See Chapter 10 of this Handbook for appraisal guidance •
      Loan closed after the NOV conditions are met • Can utilize bonus entitlement
      • VA regular refinance (cash- out) policies apply b. Amortization The Veteran
      begins making payments on a construction/permanent home loan only after construction
      is complete. Therefore, the initial payment on the principal may be postponed
      up to 1 year, if necessary. The loan must be amortized to achieve full repayment
      within its remaining term. The lender must provide evidence of the amortization
      in the loan file. Example. If it takes 6 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 6 months. Continued on next page
      VA Pamphlet 26-7 Revised Chapter 7: Loans Requiring Special Underwriting, Guaranty,
      and Other Considerations 7-15 2. Construction/Permanent Home Loans, continued
      b. Amortization, continued 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. The VA requirement that loans be amortized with approximately
      equal payments and the principal must be reduced at least once annually, also
      applies to construction loans. However, the final installment may be for an
      amount up to five percent of the original principal amount of the loan. c. What
      the Builder Must Pay? On a construction/permanent home loan, the builder is
      responsible for Interest payments during the construction period, and all fees
      normally paid by a builder who obtains an interim construction loan including,
      but not limited to: • inspection fees, • title updates, • title update fees,
      • hazard insurance during construction, and • property taxes. d. Interest Rate
      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 and permit the
      borrower to lock-in at a lower rate based on market fluctuations. The borrower
      must qualify for the mortgage at the maximum rate. Continued on next page VA
      Pamphlet 26-7 Revised Chapter 7: Loans Requiring Special Underwriting, Guaranty,
      and Other Considerations 7-16 2. Construction/Permanent Home Loans, continued
      e. What Fees the Veteran Can Pay? Fees the Veteran can pay are described in
      Chapter 8. The Veteran may not pay any fees that are the builder’s responsibility.
      f. Funding Fee and Loan Reporting The funding fee is due and payable to VA within
      15 days of loan closing; that is not tied to the commencement or completion
      of construction. The loan must be guaranteed in WebLGY within 60 days of completion
      of all NOV requirements. g. LGC Although the loan will normally be considered
      guaranteed upon closing, the LGC on a construction/permanent home loan will
      not be issued until a clear final compliance inspection report has been received
      by VA. h. If Loan Proceeds are Not Fully Disbursed If the construction is not
      fully completed and loan proceeds are 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 completed, and • add any loan disbursements made for the
      purchase of the land on which the construction is situated. VA Pamphlet 26-7
      Revised Chapter 7: Loans Requiring Special Underwriting, Guaranty, and Other
      Considerations 7-17'
  judgment: false
