What is the VA Renovation Loan and How To Use It?

VA Renovation Loan: The Home Improvement Loan For Veterans

If you’re in the market for a new home but find yourself continuously outbid on move-in-ready properties, exploring alternatives might be your next step. One such alternative is purchasing a fixer-upper and transforming it into your dream home, tailored to your family’s needs.

For those eligible, leveraging a Department of Veterans Affairs (VA) loan for a renovation project could be a smart move. VA renovation loans extend the benefits of traditional VA loans by allowing borrowers to combine both the purchase price and the cost of improvements into one manageable loan.

Here’s a closer look at VA renovation loans, including their advantages, drawbacks, and other financing options for home improvements if a VA renovation loan isn’t an option for you.

Understanding VA Renovation Loans

A VA renovation loan is a specialized type of mortgage for veterans and service members that folds the expense of home repairs or upgrades into the overall loan amount.

This approach eliminates the need for a separate loan for renovations, streamlining the process with a single loan and monthly payment. It’s also applicable for refinancing your existing mortgage, incorporating the costs of home improvements into the new loan.

How VA Renovation Loans Stand Apart

VA renovation loans share many of the same features as standard VA loans, including the possibility of zero down payment. However, they come with unique aspects due to their renovation component.

Like traditional VA loans, they offer the benefit of no down payment, the option to roll the funding fee into the loan, closing costs, and competitive interest rates. The key difference lies in the additional steps required to secure approval for renovations. This includes obtaining estimates from VA-registered contractors and having a VA appraiser assess the post-renovation value of the property.

Eligibility for a VA Renovation Loan

To secure a VA renovation loan, you must first qualify for a VA loan.

Service Requirements

The initial step is obtaining a certificate of eligibility (COE), proving you meet the VA loan’s service criteria. Veterans or active military personnel qualify for a VA loan after serving 90 consecutive days of active duty during wartime or 181 days in peacetime. For members of the National Guard or Reserves, the requirement is 6 years of service. Qualifying surviving spouses are also eligible for these loans.

Credit and Income Requirements

Beyond service requirements, applicants must satisfy their lender’s credit criteria. While the VA does not enforce a minimum credit score, lenders typically do, often requiring a credit score of at least 620 for a VA renovation loan. Some may demand higher scores. Applicants must demonstrate a steady income and adhere to the lender’s debt-to-income ratio guidelines.

Property Eligibility

VA loans are intended for purchasing a primary residence, though certain strategies exist for buying a second home using these loans.

Eligible properties include multiunit homes of up to four units, provided you make one unit your primary residence for at least a year. Afterward, you may acquire another similar property.

Approved Uses for Loan Funds

VA renovation loan funds must be used for repairs or improvements that enhance the property’s safety or livability. Luxurious additions, such as swimming pools, are not covered.

Typically approved improvements might include updating HVAC systems, repairing pathways, enhancing accessibility for disabled individuals, replacing outdated appliances, or other modifications that contribute to a safer, healthier living environment.

Major structural changes are beyond the scope of VA renovation loans. If significant reconstruction or foundational work is required, this loan type will not cover those expenses.

Lenders can provide detailed guidance on eligible improvements and repairs.

All renovations must be finished within 120 days of closing and carried out by a VA-approved contractor.

Renovation Cost Limits

Lenders usually set a cap on the amount that can be borrowed for repairs and improvements, often up to $50,000.

For instance, if you aim to purchase a home for $150,000 and face a $50,000 limit for renovations, the maximum loan amount you could obtain would be $200,000.

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Advantages of the VA Renovation Loan

The VA renovation loan extends the already significant benefits of a standard VA loan by offering additional advantages.

Financing Based on Future Home Value

Unlike typical mortgages that rely on the property’s current value, VA renovation loans calculate loan amounts based on the projected value of the home after renovations are complete. A VA appraiser will estimate this future value.

Expands Your Housing Options

For those finding it challenging to locate a move-in-ready home within their budget, the VA renovation loan can be a game-changer. It allows the purchase of homes needing renovations and provides the funds for these necessary upgrades.

Competitive Financing Option

Compared to other home improvement financing options, VA renovation loans often come with more favorable terms, such as lower interest rates, no down payment, and the absence of mortgage insurance requirements. Plus, the convenience of a single monthly mortgage payment eliminates the need for managing multiple loans.

Disadvantages of the VA Renovation Loan

Despite its benefits, the VA renovation loan might not suit everyone. Here are some potential drawbacks to consider.

Availability Challenges

Finding lenders that offer VA renovation loans can sometimes be difficult.

Renovation Budget Caps

For homes requiring extensive repairs, the maximum amount a lender will provide for renovations might fall short of the actual costs needed.

Restrictions on Use

The scope of work allowed with VA renovation loans is limited to improvements that enhance the home’s safety and livability. Luxurious upgrades or significant structural changes are not permitted.

Investment Return Limits

The financial return on the renovations may not always match the investment. If the combined cost of purchasing and renovating the home surpasses its projected post-renovation value, you may need to pay the difference in cash at closing.

Securing a VA Renovation Loan: A Step-by-Step Guide

Navigating the process of obtaining a VA renovation loan involves several key steps.

1. Obtain Your Certificate of Eligibility (COE)

The first step is confirming your eligibility for a VA loan by acquiring a COE. This can be done through the VA’s eBenefits portal online or by collaborating with your lender to secure one.

2. Secure Preapproval from a Lender

Identify a lender that provides VA renovation loans and work with them to get preapproved. This is an essential step in understanding how much you can borrow.

3. Collect Estimates from a VA-Certified Contractor

While the VA does not directly approve contractors, it requires them to register with a VA Regional Center to receive a VA builder ID number. Your contractor must submit the following to obtain this number:

• Builder information and certification on the builder’s letterhead
• VA Form 26-421 (Equal Employment Opportunity Certification)
• VA Form 8791 (VA Affirmative Marketing Certification)
• A state or local authority-required builder’s license copy

Your contractor will then provide an estimate for the proposed renovations. It’s important to note that the VA does not allow borrowers to undertake the renovations themselves.

4. Schedule and Complete a VA Appraisal

A VA-certified appraiser will conduct an appraisal to determine the property’s value after renovations are complete. The loan amount will be based on the lesser of this as-completed value or the total acquisition cost (purchase price plus renovation expenses).

5. Finalize the Loan at Closing

With all approvals in place, including the proposed repairs and loan specifics, you’ll proceed to close the loan. Renovation work can commence post-closing.

6. Oversee the Completion of Renovations

Monitor the progress of the renovations to ensure they meet your specifications. The lender will oversee the financial aspects, ensuring funds are appropriately disbursed for the project.

7. Conduct a Final Inspection

A final inspection by a VA appraiser will verify that all renovations meet the VA’s minimum property standards and confirm the completion of the work.

Exploring Home Improvement Financing for Veterans Beyond VA Renovation Loans

Given the challenges in finding and qualifying for VA renovation loans, especially for substantial repair projects, veterans may benefit from considering alternative financing options.

VA Cash-Out Refinance Loan

For veterans needing funds for home improvements, a VA cash-out refinance could be a viable option. This allows you to access the equity in your home for your project needs.

VA Energy Efficient Mortgage

A VA energy efficient mortgage is tailored for veterans looking to make energy-saving updates to their home, offering a specialized solution for financing these improvements.

FHA 203(k) Loan

Similar to the VA renovation loan, the FHA 203(k) loan is backed by the Federal Housing Administration and offers comparable benefits. It might be easier to find lenders for this type of loan, although not all FHA lenders provide 203(k) loans. These loans require a minimum down payment of 3.5% and include mortgage insurance.

Fannie Mae HomeStyle® Renovation Mortgage

The Fannie Mae HomeStyle® Renovation Mortgage offers another conventional loan alternative, akin to the VA renovation or FHA 203(k) loans, with as little as 3% down payment required.

Home Equity Loan or Home Equity Line of Credit (HELOC)

Known also as second mortgages, these options allow you to borrow against your home’s equity. Home equity loans offer a lump sum with fixed repayments, while HELOCs provide a flexible credit line similar to a credit card.

Personal Loan

Should the above options not suit your needs, a personal loan could offer a straightforward solution for funding your home improvement projects.

Conclusion: Navigating the Landscape of VA Renovation Loans

While VA renovation loans offer significant benefits to veterans and active service members aiming to renovate their homes, securing these loans can be challenging. It’s worth exploring the array of available alternatives that cater to different needs and circumstances, ensuring you find the right fit for your home improvement goals.