Renovations & Home Improvements
A VA loan is a $0 down mortgage option available to veterans, service members and select military spouses issued by private lenders and guaranteed by the U.S. Department of Veterans Affairs (VA). The United States government created the VA home loan program in 1944 to assist returning service members to be able to purchase homes without the need to have a large down payment or a high credit rating. To date, the VA loan program has guaranteed more than 25 million VA loans, and continues to help service members to this very day. However, sometimes a veteran may already have a home but may have fallen behind on the upkeep of it; the VA loan program can offer several solutions to service members in that instance as well.
VA Rehab And Renovation Loans
VA rehab and renovation loans allow veterans and service members a low-cost, no-down-payment method of either fixing up their current home or purchasing a fixer-upper and carrying out the necessary renovations to it. Similar to traditional VA loans, VA rehab and renovation loans require no down payment and no mortgage insurance; however, borrowers may find difficulty in securing a lender who offers these types of loans, as they are less common than traditional VA loans.
With a VA renovation loan, you’re not limited to homes that already meet the VA’s minimum property requirements. You can use the repair money to bring the home up to the VA’s standards.
VA renovation loans will combine the cost of buying a home and the costs of anticipated repairs or improvements into one loan. The total amount that you can finance depends on the estimated value of the home once it has been purchased and renovated, which can be done by getting itemized quotes from a contractor which are then reviewed by a VA appraiser, who will then determine the ultimate value, and from there the amount of the loan.
There is little difference between a VA loan and a VA rehab or renovation loan, with the one factor separating them being that VA rehab loan is for the “alteration and repair” of a home, whereas a regular VA loan is only for purchasing or refinancing a home. However, someone who qualifies for a VA loan may also be able to qualify for a VA renovation loan – which is technically considered a “supplemental” loan – for renovating the home.
Requirements for a VA Renovation Loan
There are certain basic requirements for qualifying for a VA renovation loan, such as possessing a valid Certificate of Eligibility and at least a 640 mortgage credit score, although credit scores may vary by lender. And to go along with the typical VA loan prerequisites, a VA renovation loan also has the following requirements:
- The home must be your intended primary residence once repairs are finished.
- The renovations are not just for aesthetic value; they need to improve the home’s livability, use, and safety.
- All contractors and builders must have a valid VA builder identification number.
- All construction must be completed within 120 days of the closing date.
- The property must pass the VA appraisal and meet all minimum property requirements upon completion.
- If a borrower is refinancing, they can have no more than a 90 percent loan-to-value ratio. They also must have been in the home at least 12 months.
What You Can Use a VA Renovation Loan For
While VA renovation loans are very helpful and can go a long way towards much-needed repairs, there are some limits as to what exactly they can be used for. You can’t do major structural work such as adding a new floor or room, or add amenities such as a swimming pool or fancy landscaping. In addition, any work that requires a structural engineering report is not allowed; the work must be permanent and has to increase the home’s livability and value.
Here is a list of what improvements and/or repairs you are allowed to do with a VA renovation loan:
- Repair or add new windows, doors, or siding.
- Repair or add new roof or gutters.
- Install new HVAC systems or water heaters.
- Improve insulation.
- Treat mold or lead paint.
- Make updates to improve energy efficiency.
- Repair or replace the flooring.
- Repair or replace electrical or plumbing systems.
- Accessibility updates.
However, while there are many advantages to VA renovation loans, there are a few downsides to them as well, the main one being that they cannot be used for luxury additions to your home such as pools, fireplaces and/or fire pits, adding rooms, or major structural repairs.
The types of homes that you can use a VA renovation loan for is limited as well; similar to a traditional VA loan, you cannot use them for rental houses or for houses that you intend to fix up and then sell for a profit.
VA Renovation Loan Alternatives
In addition to a VA renovation loan, there are several alternative methods of getting the funds you need to make repairs and renovations on your home.
One is known as a VA cash-out refinance, which can be used if you owe less on your mortgage than the overall value of your home; in this instance, you can tap into your home equity with a VA cash-out refinance. Unlike a VA renovation loan, this money can be used for any purpose you want, up to and including making improvements or repairs on your home. A conventional or FHA loan can be refinanced into VA-backed mortgage this way as well.
Next is a VA loan for energy efficiency, which allows a borrower to roll the cost of making energy efficiency improvements on a home – such as adding solar panels, thermal windows or insulation – into a VA purchase or refinance loan. If your loan is $3,000 or less, the VA assumes that the cost of improvements will be offset by the drop in your utility bills. However, energy efficiency loans that exceed $3,000 are typically subjected to greater degrees of scrutiny by the lender.
And finally, a VA supplemental loan can also be utilized to finance improvement projects that improve the home’s basic livability, but not for fancy extras like extra rooms or swimming pools. VA supplemental loans can be set up as a second mortgage, included in a refinance, or added to the existing mortgage.
If the cost of the VA supplemental loan is $3,500 or less, you will need a VA-approved appraiser to sign a “statement of reasonable value,” but if the cost of renovations exceeds that amount, a “notice of value” statement and compliance inspection will be required by the lender.