Deciphering the VA Lender’s Handbook Chapter 10 Part 7
The first step for this article is going to be defining our terms because it can get a little confusing. “New construction” means a property that has been fully completed prior to the veteran taking a VA loan out to purchase the home. In short, “new purchase” simply means that the veteran borrower will be the first occupant of the home, rather than buying it from the previous resident. The exceptions to the requirement that construction has been completed are things that are customer preference such as how the interior walls are to be finished, floor coverings, appliances, fixtures, and equipment and any improvements for which an escrow has been approved. Do not confuse new construction with “existing construction” which means that the property has already had at least one occupant before you purchase it, or “proposed construction” which is a loan for the purpose of building a new home.
Since a new construction home is already completely built before you try to buy it, an appraisal is not required on the construction exhibits nor does the work on the construction need to be inspected during the work. If the VA sees fit, they may work with the builder to inspect and evaluate the work while construction is under way. This is done between the VA and the builder and no action is required of the borrower or the lender. To be eligible for a VA loan, a property that is appraised as a “new construction” must be covered by a warrant. There are two types of warranties the VA will accept:
1. A one-year VA builder’s warranty,
2. Or a ten-year insurance-backed protection plan.
If the builder offers the one-year VA builder’s warranty, the VA has some requirements which involve the borrower. First, the borrower has to provide a signed statement that essentially says the following: “I am aware that VA did not inspect this property during construction and that VA assistance with construction complaints will be limited to defects in equipment, material and workmanship reported in writing during the one-year VA builder’s warranty period.” In addition to your signed statement, the VA will also require the builder to fill out VA Form 26-1859, Warranty of Completion of Construction, so the VA has a clear record of the warranty. This helps protect you from builders being unwilling to uphold their warranty and gives you recourse if that happens. The thing to remember here is that if the builder provides the one-year VA builder’s warranty, it’s all fairly simple. If the builder provides the ten-year insurance-backed protection plan, it’s also fairly simple.
Normally, only two things need to be provided: a signed statement from you that is similar to the one above, but has some differences: “I am aware that VA did not inspect this property during construction and that it does not qualify for VA assistance with construction complaints.” and evidence from the builder that the property is enrolled in a ten-year insured plan acceptable to HUD. Things get complicated when the builder is only occasionally involved with VA financing and is not willing to offer either of those two warranty options. In cases like that, there are a number of things required to get the ball rolling. Some of them require direct involvement on your part as the borrower, and the rest are things that are good for you to be aware of.
First, you guessed it, a signed statement from you that says the following: “I am aware that this property does not qualify for VA assistance with construction complaints, since it was not inspected by VA during construction. I am also aware that this new property will not be covered by either a one-year VA builder’s warranty or a ten-year insured protection plan, as is normally required in this situation.” Next, the builder also provides a written certification that they don’t do VA financing very often and that they followed standard building practices and local building codes in constructing the building. Third, the lender needs to obtain a copy of all the documentation issued by the local building authority to verify that the construction on the property was inspected by them and found to be up to code in all regards. In areas where the building authority does not inspect new properties, the builder must make a signed statement acknowledging that.