What are the Differences?
When it comes to home mortgages, there are a vast array of different options out there available different to achieve different goals, and when looking at them as a whole it can prove to be quite confusing. The purpose of this article is to take two very distinct and different loan types and compare and contrast them to find out which one may or may not suit your individual purposes.
Two Very Distinct Purposes
The two loan types being discussed here consist of 203(k) Rehab loans and New Construction loans, two very different lending agreements geared toward two very distinct purposes serving two different populations. Let’s delve in and see if either one of these loans could be right for you as a potential homeowner.
A Federal Housing Administration (FHA) 203(k) Rehab loan – which is available to all members of the general public who qualify – is a type of loan that can be used to pay for both the purchase of a home and any renovations or repairs that it may need, all rolled up into a single mortgage. For all intents and purposes, an FHA 203(k) Rehab loan enables those who are looking to purchase a home that would be considered a “fixer-upper” requiring multiple repairs – including significant ones – to roll the cost of buying the home and the funds needed to effect its renovation into a single loan.
In addition, those who are already homeowners can apply for a 203(k) Rehab loan and, if approved, can use those funds to refinance their property and pay for upcoming repairs through a single mortgage.
A 203(k) Rehab loan is backed by the FHA, can take the form of a 15-or-30-year fixed-rate mortgage or adjustable-rate mortgage (ARM), and covers both the cost of any given property and subsequent repairs; the funds can be used for both materials and labor costs, and overall the loan may present a more cost-effective way to pay for your home improvement projects.
Since an FHA 203(k) loan is insured by the government, it may be easier to acquire than a conventional home loan, as there are more flexible qualification terms and requirements; however, as whenever a loan of any type is taken out, there are certain base qualification standards that must be met, such as income, credit history, credit score, debt-to-income ratio, and other factors.
In contrast, VA New Construction loans is NOT available to members of the general public, but instead are exclusively for current service members, qualifying National Guard personnel, eligible reservists, and qualifying surviving spouses or veterans. These are short-term loans that will help the borrower cover the costs of constructing a new home from scratch; unlike 203(k) Rehab loans, VA New Construction loans are not for effecting repairs on existing homes.
A VA loan is a mortgage loan guaranteed by the United States Department of Veterans Affairs (VA). The program was started in 1944 to help veterans returning home from World War II to acclimate back to civilian life. There are numerous types of VA loans available for qualified individuals, but VA New Construction Loans are more difficult to come by then most as they are offered by fewer lenders than the others in the program; in addition, there is a significant amount of paperwork involved.
Some of the advantages that active military personnel or veterans can gain from using a VA New Construction loan includes a lack of any down payment or private mortgage insurance (PMI) requirements. However, when compared to standard VA loans, there were also some extra hurdles to overcome that can lengthen the process; VA New Construction loans can typically take up to 45 to 60 days to process on average.
Aside from having the prove that you are an eligible service member or veteran, other requirements include finding a VA approved and licensed builder, and a complete set of plans for the project – including documentation about the materials you plan to use – must be submitted at the time you apply for the loan; the plans for the proposed home must then be appraised.
Once approved, the funds go into an escrow account after you close on the loan to be withdrawn on an “as-needed” basis. Once the home is built, a final official VA inspection will be required. After everything is finalized, it is possible to transition the loan to a permanent VA loan via construction-to-permanent financing, depending on the way the original lending agreement was structured.
The VA doesn’t set or regulate interest rates on VA New Construction loans; instead, they are set by the lender based mainly on factors such as the borrower’s credit score, lending history, and debt-to-income ratio. Also, the loan cannot be used for all residence types, such as mobile or manufactured homes; your loan officer or lender can give you more information on what type of construction is allowed.
As you can see, there are a vast array of differences between 203(k) Rehab loans and VA New Construction loans, with each serving very specific purposes and each geared towards very specific populations. However, what they have in common is their ability to help qualified Americans achieve the dream of home ownership, and if the purposes of either of these loans may serve to aid you in that endeavor – provided you meet their individual qualifications.