VA Renovation Loans: What They Are and How They Work
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Eligible military borrowers can use a VA renovation loan to buy a home that needs work — or refinance their existing home — and roll the cost of those home improvements into the loan. This kind of loan is sometimes referred to as a “VA rehabilitation loan” or a “VA rehab loan.”
The U.S. Department of Veterans Affairs (VA) backs several kinds of home improvement loans for veterans. Read on to decide which VA home renovation loan product is the right fit for you.
What is a VA renovation loan?
A VA renovation loan is for eligible active-duty service members, veterans, reservists, some eligible spouses and certain other uniformed service personnel (such as Public Health Service officers). The costs of fixing up the home can be included in the loan amount.
These home improvement loans for veterans feature very favorable terms, including fewer closing costs, no minimum credit score and no private mortgage insurance. In addition, no down payment is required, whereas a home renovation or “fixer-upper” loan often requires at least a 3% down payment. Almost 90% of VA-backed home loans are made with no down payment.
A VA home improvement loan can be used for:
→ The home purchase
→ The costs of renovation (plus a contingency fund if necessary)
→ Paying off and replacing an existing mortgage (in the case of a cash-out refinance)
→ The VA funding fee
→ Closing costs (for refinanced loans)
Differences between a VA renovation loan and a VA loan
Both the VA direct home loan and the VA-backed home loan provide very favorable terms for homebuyers. The direct loan is held by the VA, while the VA-backed loan is serviced by a private lender.
The VA also has some home renovation loan additions, which — as their names might suggest — are for altering or improving a residence bought or refinanced with a VA loan.
How does a VA renovation loan work?
You need a certain amount of time in the service to be “entitled” to a VA home loan. To determine your entitlement amount, ask the VA for a certificate of eligibility. You’ll also need to meet minimum requirements for a VA loan.
The loan size is based on either the cost to acquire your home or its after-improved value, whichever is less. In most cases, renovations must be done by a VA-approved contractor; your lender may have additional rules. If an appraisal is needed, your lender must choose a VA-approved appraiser.
Other eligibility requirements for VA renovation loans are listed below.
Eligibility requirements for VA renovation loans
In order to get a VA home improvement loan, you’d need to provide:
- Certificate of eligibility: This certificate shows VA renovation loan lenders that, based on your service history and/or duty status, you are eligible to apply for a VA loan.
- Minimum credit score: The VA doesn’t have a minimum credit score. However, many VA lenders generally require a minimum 620 credit score.
- Types of improvements: Renovations must be typical to those found on comparable properties in your community. If necessary, they must also improve the home to minimum VA property standards.
- Eligible property: You must live in the home that you wish to renovate.
Additional VA renovation loan products
The following areVA loan products that can be added on to a regular VA purchase or refinance loan.
VA energy efficient mortgages
As the name suggests, an energy-efficient mortgage helps improve the comfort level and reduce the utility costs of your home. Some highlights:
→ You can borrow up to $6,000.
→ Acceptable renovations include insulation, solar heating and cooling systems, new storm windows and doors and furnace modifications.
→ For loans under $3,000, VA renovation loan lenders will approve costs based on the renovation price, as documented by the bids submitted by the homeowner. If the price is between $3,000 and $6,000, lenders will approve costs based both on bids and whether the increased mortgage payment will exceed estimated utility cost savings, based on information the lender obtains from local utilities, state agencies or other reputable sources.
→ It is possible to do this work yourself, as long as the result meets current building codes, state or federal regulations and any lender guidelines. However, the VA suggests that veterans first contact a qualified source for a home energy audit to determine which improvements are needed. It also notes that if the veteran homeowner performs any labor for these improvements, the loan amount will only increase enough to cover material costs.
VA loans for alterations and repair
Recognizing that aging U.S. housing stock may need work, the VA offers loans to fix or upgrade your home. You can take out this loan at the same time you get a VA loan, up to the lesser cost of purchase price or the finished value (determined by a VA-approved appraiser). If you already own a home, an alterations and repair loan can be done as a cash-out refinance, up to the amount of the finished value.
Things to know about VA loans for alteration and repair:
- Renovations are typically for items like roofing, floors, foundation and electrical, HVAC and plumbing systems.
- You can choose your contractor, as long as they’ve registered with the VA. Your VA lender might have their own requirements.
- The builder and/or contractor will be paid as the work is being done. You must approve each disbursement in writing.
VA supplemental loans
The supplemental loan is used to protect or improve your home’s basic utility or livability, as it relates to buying, improving or maintaining real property, including fixtures. This supplemental loan can either be obtained in one of two ways — either added to the balance of an existing VA loan, or otherwise secured by a separate lien on the home. If you already own a home and want to do a few minor upgrades, this might be a good fit.
Things to know about VA supplemental loans:
→ No more than 30% of the loan amount can be used on items like cooking, refrigerating, heating or washing equipment. In addition, anything you buy must relate to or supplement the main alteration for which the loan is being used in the first place.
→ If your loan is less than $3,500, you need only submit a “statement of reasonable value” from a VA-approved appraiser.
→ If the supplemental loan is more than $3,500, you’ll need to obtain a “notice of value,” which is based on an appraisal, and arrange for inspections.
Pros and cons of a VA renovation loan
| Pros | Cons |
|---|---|
| For veterans who want to upgrade their homes, a VA renovation loan might be the perfect fit. Here are some of the reasons why: You get the benefits of a VA loan. These include no down payment and no need for private mortgage insurance. The VA works with many banks, credit unions and mortgage lenders. The VA funding fee may be waived. Often this happens in cases with disability or death related to service. Along with the VA renovation loan, three additional renovation loan products are available. They let you choose a specialized repair/improvement or a major overhaul. | While VA loans have some great advantages, it’s important to look at the entire picture. Here are a few things to keep in mind when considering a loan. You need a certain level of service to get a VA loan. This could be as few as 90 days or less, but also as many as six years. Finding a lender isn’t guaranteed. For example, not many lenders are experienced with alteration and repair loans. The VA funding fee is required for most borrowers. The funding fee adds anywhere from 0.50% to 3.60% to the loan. VA renovation loans are for certain kinds of improvements only, and these must be similar to those found in comparable homes nearby. A home equity loan, HELOC or conventional cash-out refi doesn’t have those kinds of restrictions. |
Home improvement loan alternatives
If you don’t want to use your VA home loan entitlement to pay for renovating your home, consider these other lending options.
VA cash-out refinance
With a cash-out refinance loan, you’re swapping your current loan for one with a larger amount and taking the difference in cash. Some people use the money for things like debt payoff or home improvement. With a VA cash-out refi, you can also turn a non-VA loan into a VA loan. As noted earlier, a VA alterations and repair loan may be taken as a cash-out refi. Other types of VA renovation loan products have certain limitations, such as the loan amount or how much of the loan can be used for any given purpose. By contrast, a VA-backed cash-out refinance loan doesn’t regulate what you can do with the money.
FHA 203(k)
An FHA 203(k) loan may be a good match for those who want to buy a fixer-upper and roll the renovation costs into the purchase loan. It can also be used if you own a home and want to refinance your loan to make improvements. You have two FHA 203(k) loan options: “limited,” for minor, non-structural issues only, and “standard,” for major projects — the latter option will require you to hire a specialized consultant. Many VA renovation loan lenders ask for at least a 620 credit score, but with an FHA 203(k) loan, you may qualify with a credit score as low as 500.
Fannie Mae HomeStyle Renovation loan
The Fannie Mae HomeStyle® Renovation loan combines the purchase price and renovation costs into a single loan product. It has several options that VA renovation loans don’t, including the option to roll mortgage payments into the loan if the house is not currently habitable, as well as the possibility of down payment assistance.
Home equity loan or HELOC
A home equity loan or a home equity line of credit (HELOC) are both types of second mortgages that will let you tap into the equity you’ve built up. A home equity loan is a lump-sum, fixed-rate loan, while a HELOC is a revolving credit line that can be drawn on for a certain time period before repayment begins. You’ll typically need at least 15% equity in your home to use these options, whereas the VA may guarantee a home renovation loan either in conjunction with a first mortgage or on a residence already owned by a veteran, without regard to equity.
FHA Title I loan
A low- to moderate-income homeowner who needs essential improvements on their home (including a manufactured home) might qualify for an FHA Title 1 loan. These are backed by the federal government and designed to help make your place more livable. You can borrow up to $7,500 without collateral, and up to $60,000 using your home as collateral. Unlike a VA alteration and repair loan, an FHA Title 1 loan can’t be used for any kind of cosmetic or luxury upgrades.