Hidden Fees to Watch Out for with VA Construction Loan Lenders

When considering a VA construction loan to build your dream home, it is essential to understand not only the benefits but also the potential hidden costs that may arise. While VA construction loans offer numerous advantages, such as no down payment and competitive interest rates, there are fees and charges that may not be immediately apparent. Being aware of these hidden fees can help you better prepare for the financial journey ahead. Below, we break down the most common hidden fees associated with VA construction loan lenders and how to navigate them effectively.

1. Origination Fees

Origination fees are standard costs charged by lenders for processing a loan application. While the VA limits origination fees to 1% of the loan amount, some lenders may attempt to bundle additional charges under this category. These added costs can quickly inflate your overall expenses.

What to watch for:

• Ensure that the lender adheres to the VA’s 1% rule.

• Request a detailed breakdown of the origination fee to identify any unwarranted charges.

How to avoid surprises:

• Compare origination fees from multiple lenders before committing.

• Ask your lender if any fees included in the origination charge can be negotiated or waived.

2. Inspection Fees

VA construction loans typically require multiple inspections throughout the building process to ensure that the home meets VA standards. These inspections are necessary but can add up quickly, especially if additional inspections are required due to delays or corrections.

What to watch for:

• Fees for third-party inspectors, which are often passed on to the borrower.

• Additional charges for re-inspections if issues arise during construction.

How to avoid surprises:

• Get a clear timeline of inspection requirements and associated costs from your lender.

• Work closely with your builder to avoid delays or errors that may necessitate additional inspections.

3. Construction Draw Fees

As construction progresses, funds from your VA construction loan are released in increments, or “draws.” Lenders often charge a fee for each draw to cover administrative expenses.

What to watch for:

• Fees that increase with the number of draws.

• Unclear terms about how draw fees are calculated.

How to avoid surprises:

• Discuss the draw schedule with your lender and builder to minimize the number of draws.

• Include draw fees in your overall budget to prevent unexpected shortfalls.

4. Title Update and Title Insurance Fees

Title updates are necessary to ensure that there are no liens or disputes on the property during construction. Additionally, title insurance protects the lender and borrower against title-related issues.

What to watch for:

• Repeated title update fees during the construction process.

• Premiums for lender’s title insurance, which are typically required.

How to avoid surprises:

• Inquire about the frequency and cost of title updates.

• Shop around for title insurance to find competitive rates.

5. Builder Approval Fees

The VA requires that the builder you choose for your construction project be approved. Some lenders may charge fees to facilitate this approval process.

What to watch for:

• Charges for reviewing builder credentials and certifications.

• Additional fees if your preferred builder needs to undergo extra scrutiny or approval.

How to avoid surprises:

• Work with a builder who is already VA-approved to streamline the process.

• Confirm with your lender whether builder approval fees apply.

6. Permitting and Zoning Fees

Obtaining the necessary permits and ensuring zoning compliance is a critical part of the construction process. These fees are typically the responsibility of the borrower but may not be explicitly discussed upfront.

What to watch for:

• Fees for permits related to construction, utilities, and environmental compliance.

• Costs for zoning variances if your project requires them.

How to avoid surprises:

• Consult with your builder and local government offices to estimate permitting and zoning costs.

• Factor these expenses into your initial budget.

7. Interest Rate Lock Fees

Construction projects can take several months to complete, and interest rates may fluctuate during that time. Some lenders charge a fee to lock in a specific interest rate for an extended period.

What to watch for:

• High fees for extended rate locks.

• Penalties for failing to close within the locked period.

How to avoid surprises:

• Ask your lender about the cost and terms of rate locks.

• Consider a lender who offers flexible rate lock options or extensions.

8. Change Order Fees

During construction, changes to the original plans can lead to additional costs, known as change order fees. These fees cover the administrative and material costs associated with altering the project.

What to watch for:

• Charges for both minor and major changes.

• Additional costs if changes delay the project timeline.

How to avoid surprises:

• Finalize your plans before construction begins to minimize changes.

• Review the builder’s change order policy and associated fees.

9. Unforeseen Site Preparation Costs

Site preparation costs, such as clearing land, grading, or addressing soil issues, are often underestimated. These expenses can escalate quickly if unexpected challenges arise.

What to watch for:

• Costs for dealing with rocky terrain, poor soil quality, or drainage issues.

• Additional charges for resolving issues discovered after construction begins.

How to avoid surprises:

• Conduct a thorough site assessment before finalizing your construction plans.

• Include a contingency fund in your budget for unforeseen site preparation costs.

10. Closing Costs

While VA loans typically have lower closing costs compared to conventional loans, there are still expenses to consider. Closing costs for a VA construction loan may include appraisal fees, credit report fees, and recording fees.

What to watch for:

• Additional charges bundled into closing costs.

• Fees that are higher than average for your area.

How to avoid surprises:

• Request a Loan Estimate early in the process to understand closing costs.

• Compare estimates from multiple lenders to find the best deal.

11. Escrow Account Fees

Lenders may require you to set up an escrow account to cover property taxes, homeowner’s insurance, and other expenses. These accounts can come with administrative fees.

What to watch for:

• Monthly escrow charges that exceed your expectations.

• Fees for setting up or maintaining the escrow account.

How to avoid surprises:

• Ask for a breakdown of escrow-related costs.

• Shop around for competitive insurance rates to lower your escrow payments.

12. Loan Modification Fees

Once construction is complete, a VA construction loan typically converts into a permanent mortgage. Some lenders charge fees for this transition, known as loan modification fees.

What to watch for:

• High costs for modifying the loan terms.

• Additional fees if the loan conversion process is delayed.

How to avoid surprises:

• Confirm the terms and costs of the loan modification process upfront.

• Ensure that your builder stays on schedule to avoid delays.

Conclusion

VA construction loans are a fantastic resource for eligible veterans and active-duty service members looking to build a home. However, hidden fees can quickly add up, affecting your overall budget and financial planning. By understanding these potential costs and asking the right questions, you can navigate the process more confidently and avoid unpleasant surprises. Always review all documentation carefully, compare lenders, and consult with professionals to make the most informed decisions possible. With proper planning and vigilance, you can turn your dream home into a reality without unnecessary financial strain.