VA Renovation Loan: 4 Home Improvement Options for Military Borrowers
Backed by the Department of Veterans Affairs (VA), a VA renovation loan can help eligible military borrowers buy a fixer-upper or make improvements to their existing property. There are four different types of VA loans for home improvement, and each one allows you to roll the cost of your renovations into your purchase or refinance loan — so you’ll only have one monthly payment to fit in your budget.
- The VA offers four different types of loans that can be used to make home improvements.
- Each type has its own stipulations, but they all come with the standard VA loan benefits, including no down payment or mortgage insurance requirements.
- For best results, make sure to find a VA lender who’s experienced in whichever type of VA home improvement loan you choose before getting started.
4 VA home improvement loan options
1. VA renovation loans
The VA guarantees alteration and repair loans to help you fix or upgrade your property. Potential renovations typically include projects like roofing, floors, foundation and electrical, HVAC and plumbing systems. You can access financing during the purchase or refinance process.
Unlike with a traditional VA loan, a VA-registered appraiser will determine the value of your home after renovations are complete, allowing you to roll the purchase price and cost of renovations into one large loan. While convenient, you will be limited to alterations that are in line with others in your community, and you’ll be required to provide written approval before each loan disbursement to your builder or contractor (who must also be registered with the VA).
2. VA cash-out refinance
If you already own your home and have built up some home equity, you may be able to cover the cost of improvements with a VA cash-out refinance loan. This version of the VA alteration and repair loan also allows you to borrow up to the estimated appraised value of the home after renovations have been done.
In this case, you’ll just replace your existing mortgage with a bigger one and use the difference to cover repairs (though you’ll be beholden to similar requirements as the purchase loan).
Notably, you can also turn a non-VA loan into a VA loan with a VA cash-out refinance.
Whether you’re taking out a purchase or refinance loan, your lender may require a contingency reserve worth up to 15% of the renovation cost. These funds may be used to cover any unforeseen expenses that may crop up during the project. However, any unused funds may be returned to you at closing or applied to your principal loan balance.
3. VA energy-efficient mortgages
The VA allows you to roll the cost of certain energy-efficient improvements — like insulation or solar heating and cooling systems — into your purchase or refinance loan. But there are some details to consider:
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In most cases, you can borrow up to $6,000 for these renovations — however, the approval process will vary based on the estimated cost of improvements.
- Up to $3,000: The lender will approve the costs using any documented bids that you submit.
- Between $3,000 and $6,000: The lender will approve costs based both on bids and whether the increased mortgage payment will exceed estimated utility cost savings.
- Generally, the improvements must be completed within six months of closing on your new loan.
4. VA supplemental loans
VA supplemental loans are used to ensure your home’s basic livability, which means that you can only use the funds for essential improvements. They can’t be used for unnecessary upgrades, like getting a pool. However, as long as the project is eligible, the funds can either be added to the balance of an existing VA loan or made into a separate lien on the home.
Here’s what to know about VA supplemental loans:
- If your loan is $3,500 or less, you need only submit a “statement of reasonable value” from a VA-approved appraiser.
- If the 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.
How to apply for a VA renovation loan
Now that you’ve seen your options, the next step is to learn how to get a VA loan. In general, the process will include the following steps:
- Determine your eligibility: With VA loans, your eligibility is tied to your military service. Each day you serve counts toward your VA entitlement, which informs the guarantee that the VA makes to your lender.
- Learn about the requirements: VA loans don’t have as many qualifying requirements as other loan programs, but there are still a few VA loan requirements that you’ll have to meet. For example, you can’t be in default on any federal loans.
- Shop around for a VA-approved lender: Not every lender will be experienced in handling VA loans. It’s a good idea to look for one that’s very knowledgeable about various VA loan programs and offers competitive VA loan rates. For best results, get a few different loan estimates before making your final decision.
- Gather your financial documents: While you’ll still need the typical loan documents like W-2s and bank statements, you’ll also need to get a Certificate of Eligibility (COE) from the VA.
- Go through the loan application process: Once you find a home you love, you’ll work with a lender to start the application process and eventually close on a loan.
Pros and cons of getting a VA renovation loan
While VA home improvement loans have many advantages, they may not be the right fit for every renovation project. Take a look at some of the pros and cons of these loans to help you make your decision.
Pros
- Simpler qualifying requirements: VA loans have no down payment requirement and no formal minimum credit score requirement. (However, individual lenders may impose their own credit minimums.)
- Shorter waiting period after foreclosure: The waiting period to buy another property after a foreclosure can vary according to your loan program. Conventional loans have a waiting period of up to four years — for the VA, however, it’s only two years.
- Potential to waive funding fee: The VA funding fee can be waived in certain situations, especially those involving service-related death or disability.
Cons
- Strict service requirements: You’ll need to complete a certain amount of military service in order to get a VA loan. The time frame can vary depending on your type of service and circumstance, but it can range from less than 90 days to six years.
- Limited lender pool: Not all lenders offer VA loans and fewer have experience with VA loans for home improvement — as such, finding an experienced lender may take some extra legwork.
- Imposed use restrictions: There are some limits to how the funds from VA renovation loans can be used. In particular, any improvements you make must be similar to those found in comparable homes nearby.
Alternatives to a VA home improvement loan
If you decide that taking out a VA renovation loan isn’t right for you, there are plenty of other options available, including:
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 already own a home and want to refinance your loan to make improvements.
You have two FHA 203(k) loan options:
- Limited 203(k) loan: This type of loan is used for minor, nonstructural repairs costing up to $75,000. There is no minimum project cost requirement.
- Standard 203(k) loan: This loan is meant to finance major projects that cost at least $5,000. Be aware that, in this case, you’ll have to hire a specialized consultant to oversee the work.
FHA Title I loan
If you’re a low- to moderate-income homeowner who needs to make essential improvements to your home, you 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 $25,000 for a single-family home or $60,000 for a multifamily home with five units. FHA Title I loans also cover manufactured homes. Unlike a VA renovation loan, an FHA Title 1 loan can’t be used for any kind of cosmetic or luxury upgrades.
Conventional renovation loan
A Fannie Mae HomeStyle® Renovation loan combines the purchase price and renovation costs of your home into a single loan product. If you can qualify, it may be an attractive option: It offers several features that VA renovation loans don’t, including the option to roll mortgage payments into the loan if the house isn’t currently habitable.
Meanwhile, the Freddie Mac CHOICERenovation loan is another option that allows you to roll the cost of renovations and your home purchase or refinance into one loan.
Both this loan and the Fannie Mae loan only require you to make a 3% down payment, but you’ll need to have a credit score of at least 660 to qualify.
Home equity loan or HELOC
A home equity loan and a home equity line of credit (HELOC) are both types of second mortgages that let you tap into the equity you’ve built making your monthly mortgage payments. 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 on your principal balance begins.
You’ll typically need at least 15% equity in your home to use these options. In contrast, the VA may guarantee a home renovation loan without regard to equity. However, some individual lenders may set limits for an acceptable loan-to-value (LTV) ratio.