VA Renovation Loans: What They Are and How They Work
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A VA renovation loan allows eligible military borrowers to buy or refinance a fixer-upper home and roll the costs of home improvements into the loan. There are several types of VA renovation loans backed by the U.S. Department of Veterans Affairs to choose from, and understanding how these loans work will help you decide which one best fits your remodeling plans.
What is a VA renovation loan?
A VA renovation loan is a home improvement loan that allows eligible active-duty service members, veterans, reservists and spouses to buy or refinance a home and include the remodeling costs in the loan amount.
Military borrowers enjoy flexible VA lending guidelines, including no down payment, minimum credit score or mortgage insurance. The biggest advantage of VA renovation loans is that you may be able to finance up to 100% of the home’s value. Meanwhile, other renovation loans require at least a 3% down payment.
The money from a VA renovation loan can be used to pay the:
- Purchase price of a new home
- Balance (and pay off) of your existing mortgage
- Renovation costs, as well as extra funds in case you run over budget
- Loan closing costs
How does a VA renovation loan work?
The basic mortgage process to get a VA renovation loan is the same as getting a traditional VA loan. You must have enough VA entitlement for the loan amount, and meet the minimum VA mortgage requirements. You can verify how much entitlement you have by requesting a certificate of eligibility from the VA.
Here are nine steps you’ll need to take to get a VA renovation loan:
1. Verify that you’re eligible for a VA loan.
2. Work with your lender to ensure you meet VA borrowing guidelines.
3. Determine if the proposed repairs meet VA’s minimum property standards.
4. Confirm when your lender will schedule the VA home appraisal (if applicable).
5. Close the loan.
6. Set up the draw schedule for payments during the remodel.
7. Authorize the payment of draws once you verify the work is complete.
8. ENSURE THE appraiser has confirmed the HOME meets VA’S property standards.
9. Contact your lender to set up final inspections once the work is finished.
The loan amount is based on the acquisition cost or the after-improved value of your home, whatever is less. The after-improved value is an estimate of how much your home will be worth after the remodeling is done; that estimate is based on the unbiased opinion of a licensed VA-approved appraiser.
The acquisition cost has different meanings depending on whether you’re buying or refinancing. With a purchase loan, it’s the sales price plus the home improvement costs and closing costs. For a refinance, acquisition costs include the balance of your current loan, plus remodeling and closing costs.
What are the different types of VA renovation loans?
The VA offers three different types of home improvement loans for military borrowers: VA loans for alteration and repair, energy-efficient mortgages and supplemental loans. Each program can help you meet a variety of renovation needs.
VA loans for alteration and repair
This type of VA renovation loan works like a VA cash-out refinance with one big difference: You can borrow up to 100% of the fully-repaired value of your home. With a regular VA cash-out refinance, the loan amount is capped up to 90% of your home’s current value.
With a VA loan for alterations and repair:
- You can buy a home and add the repair costs up to the maximum loan amount.
- You can bring your home up to minimum VA property standards.
- You may need to pay an extra 2% of your loan amount in lender fees.
- You won’t be able to do any of the repairs yourself.
- You’ll need to choose a VA-approved contractor for the work.
The VA alteration and repair program guidelines don’t specify what types of projects are acceptable, though as long as the renovations you’re making are typically found on similar homes in your area, you may be able to finance them.
VA energy-efficient mortgages
If you’re looking to save on your utility bills, the VA energy-efficient mortgage allows you to finance the cost of “going green.” You can add the cost of energy-saving and environmentally friendly improvements to this type of VA renovation loan.
With a VA energy-efficient mortgage:
- You can finance up to $3,000 worth of improvements if you can document that the costs are for energy-saving upgrades.
- You can finance up to $6,000 of upgrades with no appraisal if the increase in your mortgage payment is offset by monthly savings on your utility bills.
- You may be able to finance more than $6,000 of improvements if an appraisal shows your value will increase because of the upgrades.
- You may be able to do the work yourself and have the cost of materials covered.
VA-approved, energy-efficient improvements include:
- Solar heating and cooling systems
- Caulking and weather-stripping
- Clock thermostats
- New/additional ceiling, attic, wall or floor insulation
Tip: Make energy-efficient improvements with a VA IRRRL
The VA interest rate reduction refinance loan (IRRRL) makes it easy to save money with no appraisal or income documentation. What’s more, you can roll in the cost of energy-efficient improvements. The only catch? You’ll need to verify you can qualify for a higher payment if it goes up by 20% or more.
Supplemental VA loans
If you’re happy with your current VA loan but want to fix up your home, a supplemental VA loan is worth considering. As long as you currently have a VA loan and the home is your primary residence, you can finance home maintenance projects to make your space more livable.
You have several options for taking out a supplemental VA loan:
- Ask your current lender to add the supplemental loan to the balance of your existing VA loan.
- Take out a new loan to pay off your current balance and roll in the construction costs.
- Take a separate loan for the repair costs and leave your current VA mortgage as-is.
- Borrow less than $3,500 without a home appraisal.
Special home improvement grants for disabled veterans
Veterans with a service-related disability may apply for a Specially Adapted Housing grant (SAH) of up to $90,364 to purchase or refinance a home, and make changes to that home to make it more suitable for independent living. Additionally, veterans living with family members may be able to make changes to a home they’re living in but don’t own with a Temporary Residence Adaptation (TRA) grant of up to $39,669.
Additional home improvement loans
If you don’t want to use your VA home loan benefits to pay for home improvements, explore these other options:
FHA 203(k) rehabilitation loan
The 203(k) program is backed by the Federal Housing Administration (FHA). It allows you to buy or refinance a home and roll in the cost of home upgrades into one loan. With an FHA 203(k) loan, your credit score can be as low as 500 with a 10% down payment.
FHA Title I loan
Low- to moderate-income homeowners can borrow up to $25,000 to renovate a single-family home with an FHA Title I loan, with no appraisal required. You can also get an unsecured $7,500 Title I loan to pay for less expensive projects, such as new appliances.
Fannie Mae HomeStyle RenovationⓇ loan
The Fannie Mae HomeStyle loan program allows you to finance repairs on primary and investment properties. The qualifying requirements are stricter than government-backed loans, but you have more options for do-it-yourself work than what a VA renovation loan offers.