VA Renovation Loan 2023 | How it works and where to get one
You can use a VA loan to buy and renovate a fixer-upper thanks to the VA renovation loan.
The process isn’t simple. Only certain home improvements can be financed, and you’ll need to follow the VA’s strict guidelines for the loan. But if the home you want to buy needs help meeting the VA’s Minimum Property Requirements, this could be the loan for you.
What is a VA Renovation Loan?
The VA Renovation Loan packages two loans into one:
- A home purchase loan: This part of the loan finances the purchase price of your home, up to its current market value
- A home improvement loan: This part of the loan finances the improvements the home needs — up to $50,000 in renovation costs
A regular VA purchase loan won’t finance a home beyond its current market value. As a result, if a home needs a lot of work, you may not be able to get a loan large enough to buy and improve the home. In the past, this limitation excluded many older homes in need of extensive work from the VA loan program.
So in 2018, the Department of Veterans Affairs introduced the VA Renovation Loan to meet this need.
If you are a veteran with your sights set on a house that needs renovations to properly qualify for VA home financing, then pursuing a VA home improvement loan is your best bet.
VA Renovation Loan requirements 2023
As with all VA mortgage loans, the VA renovation loan has certain eligibility requirements attached.
Typically, veterans and service members must have served for at least 90 days of active duty during wartime or 181 days of active duty during peacetime. But even if you don’t meet the minimum service requirements, you might qualify if you were discharged due to hardship, the convenience of the government, early out, a reduction in force, or a service-related disability.
Ultimately, you must meet these minimum requirements to qualify for a VA loan of any kind, including the VA renovation loan.
If you want to qualify for a VA renovation loan, you’ll need to obtain a Certificate of Eligibility. You can apply for your COE on the eBenefits site.
Once you have your COE, then you can pursue a VA renovation loan.
VA home improvement loan types
The VA offers three kinds of home improvement loans. Your personal financial circumstances will determine which of the following VA home loan options will best suit your needs.
Your options include:
- VA home renovation loan
- VA supplemental loan
- VA energy efficient loan
VA loan for home renovations
This VA home renovation loan is meant to be used for purchasing properties that do not and will not meet minimum habitability requirements at the time of closing. It allows veteran purchasers to factor in home renovation and rehabilitation expenses, up to $50,000.
What’s particularly useful about a VA home improvement loan of this type is that, while normal VA cash-out loans correspond exclusively to the current equity of a property, this one allows existing homeowners to access equity up to the value of the fully repaired property.
4 important aspects of VA home renovation loans:
- The process can be slow. Closing on a VA home improvement loan requires an accurate repair bid be submitted by a local, licensed contractor. Depending on who you choose, the paperwork process can take time, probably longer than an FHA renovation.
- There Are Limits. As mentioned above, VA renovation loans of this kind are often capped at a fixed amount, which may vary slightly from lender to lender. Almost no lender will provide a loan greater than $75,000.
- Third-party construction is required. Mandates require that all repairs funded by a VA home rehabilitation loan must be completed by a registered contractor, meaning you cannot use the funds to complete projects on your own.
- Repairs must meet local and state property requirements. The property must meet local and state standards within 90 days of administration of the loan, meaning it’s best to have a clear sense of these standards before you begin the process. Remember that standards may vary from region to region, and even by neighborhood.
VA supplemental loan
VA supplemental loans are used for the alteration, improvement or repair of a veteran’s primary residence that is already secured by a VA mortgage.
The funds for supplemental loans can be added either to an existing loan or refinance, or the funds can be a second mortgage similar to a home equity loan. The supplemental loan can’t raise the interest rate on your current loan, but its rate may be slightly higher since it is considered a second loan.
5 important aspects of supplemental loans:
- No luxuries allowed. Improvements must occur to the basic livability or utility of the property, meaning inessential amenities such as barbecue pits and swimming pools cannot be funded by a VA supplemental loan.
- “30%” rule. No more than 30 percent of the loan may be used for the “maintenance, replacement, improvement, repair, or acquisition of non-fixtures or quasi-fixtures such as refrigeration, cooking, washing, and heating equipment.”
- Must be occupied by owner. Supplemental loan funds can only be used to repair a home that you own and currently reside in (proof that you plan to live in the residence upon completion of the renovation is often enough).
- Notice of value. For VA supplemental loans over $3,500, you’ll need a Notice of Value (NOV) that accurately appraises the estimated cost of all repairs that will be done. For loans under $3,500, you need to supply the expected costs in a statement of reasonable value. The lender will need to approve it.
- Loan limits vary. The maximum amount you can borrow will depend on your available entitlement, your area’s loan limits, and the total value of the repairs.
VA energy efficient mortgages
Energy efficient mortgages (EEMs) are loans that let VA mortgage homebuyers (or, owners) cover the cost of energy-efficient improvements for their home. In most cases, the VA allows qualified borrowers to raise the VA loan limit up to $6,000 to finance energy-efficient upgrades — if you want more than that, you’ll need to secure a Certificate of Commitment from the VA.
Some acceptable energy-efficient improvements include (but are not limited to) solar heating and cooling systems, additional insulation (ceiling, attic, floor, etc.), storm windows and/or doors, furnace efficiency modifications, and heat pumps.
4 important aspects of VA energy efficient mortgages:
- Income verification. For EEMs under $3,000, the VA tells lenders that the cost will be offset by decreases in utility bills. But, for projects between $3,000 and $6,000, the lender is responsible for determining if the extra costs are worth it and whether you have the income to cover the increased payment.
- VA contractor not required. If you are a handy person, then you have the option of doing the repairs yourself — the EEM financing would cover just the cost of materials.
- Upfront funding fee. All VA borrowers pay 1.25% to 3.3% in funding fees when they first take out a VA mortgage. The funds borrowed for EEMs are subject to this upfront funding fee.
- You must currently have a VA mortgage. EEMS are not freestanding loans. To receive one, you must be purchasing or financing your residence with another VA home loan.
- Repairs can be done on your own. If you are capable, VA energy efficient home mortgages allow you to make home improvements without needing to hire a third-party contractor.
How the VA renovation loan process works
In a sense, a VA renovation loan is a second loan, but it works differently than a traditional VA supplemental loan, which can also be used for renovations. Instead of having two separate loans, the VA rehab loan rolls two loans together into one: the purchase loan and secondary “equity” loan” for renovations. This means you’ll only have one mortgage rate and monthly payment.
Before getting approval for this loan, you’ll need to submit plans for the specific renovations that will be made, as well as information on the contractor. Because the goal of the program is to make the home VA eligible, you’ll have to prove that the repairs will meet VA standards. This happens during the loan underwriting process.
You’ll need to have a list of the specific improvements, including how much those improvements are going to cost. This takes time, and it can slow down the homebuying process.
After the repairs are made, a VA inspector will assess the home to ensure it meets VA standards.
Can you use a VA loan to remodel your home?
You can’t use a VA renovation loan to remodel every part of your home. Only VA-approved repairs, renovations, and replacements are allowed. This is to ensure the home is livable and meets VA minimum property standards. The goal of this loan type is not to finance your dream home remodel — for that, you’ll need a different loan type.
The VA doesn’t specify a minimum or maximum allowable amount for renovation funds. So, if you qualify and only want to make $5,000 in renovations, that’s completely acceptable. That said, some lenders may have maximum amounts they’re willing to finance, so be sure to ask your lender — if the property needs $75,000 of renovations, but the lender will only fund up to $35,000, then they may not be the right lender for your needs.
How is a VA renovation loan different from a VA loan?
A regular VA loan requires that the home meet its minimum property standards before closing. However, a VA renovation loan allows you to complete repairs after closing to bring the property’s conditions to the required level.
Who can get a VA renovation loan?
Anyone who is VA-loan eligible is able to get approval for a VA renovation loan. This includes current VA loan homeowners. A VA renovation loan can also be used for refinancing to fund upgrades to your home. This may be a good way to avoid using a cash-out refinance or getting a second mortgage.
To use this loan program as a refinance, homeowners must still follow the same improvement restrictions as new homebuyers.
Allowed improvements with a VA rehab loan
A VA rehab loan will not allow you to complete any and all renovations. Instead, the Department of Veterans Affairs only approves renovation costs necessary to raise the property’s condition to meet its standards.
With that, you shouldn’t expect to use this loan to upgrade a working kitchen or restyle a working bathroom. Here are some renovations that a VA rehab loan may allow:
- Roof repairs
- Foundation repairs
- Flooring repairs
- Plumbing fixes
- Electrical issues
- HVAC system replacements
Although this is not an exhaustive list, this should give you an idea of what is deemed an allowed repair by the VA.
How to get a VA Home improvement loan
In 2018, the VA updated its guidelines to make it possible for veterans to purchase or refinance a home in need of alteration and/or repair with a VA renovation loan. This allows veterans to take advantage of older homes that may not initially be liveable while using their earned VA loan benefit.
If you want to use a VA home improvement loan, here’s how to get one.
Obtain your Certificate of Eligibility (COE)
You’ll need to meet the eligibility requirements for a VA loan. Take the time to obtain your Certificate of Eligibility before jumping into this home search, or have your VA lender request it for you.
Find a lender who offers this loan and get preapproved
The next step is to find a lender that offers this loan type.
Unfortunately, finding a lender that offers VA rehab loans can be challenging. Even VA lenders that regularly offer the regular VA home loan may not be able to help.
The reason behind the limited options is that the lender is responsible for evaluating, monitoring, and managing the repair project to ensure that the project is completed per plans so the value of the home is preserved in addition to all aspects of alteration and repair funds. That’s a big responsibility! And one that not all lenders are willing to take on.
With that, take the time to explore multiple lenders to find one willing to work with you on this loan type. If you find a lender, get preapproved.
Find the right property
In order to use a VA rehab loan, you’ll need to pursue this option in conjunction with a purchase loan or cash-out refinance on the same property.
Remember that the VA will not approve all repairs and renovations. Essentially, renovations required to make a house livable are approved. But renovations to improve the quality or style of the home will not be approved.
Common repairs include roofs, floors, foundations, plumbing, and electrical.
Get quotes from a registered VA builder or contractor
The Department of Veterans Affairs requires that you use a registered VA builder or contractor. Since a reliable contractor is critical to the success of your project, take time to find the right option.
Get quotes from several VA-approved contractors to find the best choice.
Your lender will schedule the VA appraisal. This step is to determine the as-completed value of the home. The as-completed value is the property’s value after the repairs are completed.
The as-completed number can be the cap on what you can borrow. The limit to what you can borrow can also be the acquisition cost. To calculate the total acquisition cost for purchase, add the contract sale price, total cost of repairs, contingency reserve (if any up to 15 percent of the repair cost), inspection fees, title update fees, and permits.
Ultimately the amount you can borrow is either the as-completed number or acquisition cost, whichever is lower.
Close on the loan
With all of the paperwork done, it’s time to close on the loan. After closing, you’ll have a single loan with one monthly mortgage payment.
With the right contractor in place and the loan finalized with your lender, it’s time to renovate. Hopefully, you’ll be able to move into your new home soon.
After the repairs are completed, the VA appraiser will come back out for an inspection to confirm that the home now meets the minimum property requirements set by the VA.
Pros and cons of the VA renovation loan
As with every loan type, the VA renovation loan comes with some advantages and disadvantages to keep in mind.
Let’s start with the pros:
- More choices. You can look at fixer-uppers as an option, which is very helpful in a competitive real estate market.
- Relatively affordable loan. VA loans typically offer some of the most attractive interest rates on the market.
And now for the cons:
- Limited repairs. You can’t make unapproved upgrades.
- Limited budget. The cost of the repairs cannot exceed the as-completed value, which can be difficult to plan for.
- Challenging to obtain. It will be difficult to find a lender willing to provide this loan type.
What to consider when buying a fixer-upper
A fixer-upper can be a great option. But it’s not the right path for everyone.
As you explore your home options, think about the following before jumping into a fixer-upper:
- Repairs can add up quickly. Seemingly simple things can get expensive quickly.
- Expect delays. Home renovations are notorious for dragging out. Some delays, like permitting and weather, are out of their control even with the best contractor.
- Plans can change. Something is bound to disrupt a home renovation. Whether supply chain issues or weather rains on your parade, be prepared to adapt.
Although a fixer-upper can be an affordable way to get into your favorite neighborhood, be careful of biting off more than you can chew.
Alternatives to a VA renovation loan
A VA renovation loan isn’t your only option. Check out these other loan types if you are looking for a fixer-upper:
- FHA 203(k) loan. The Federal Housing Administration offers FHA loans that roll the cost of your home purchase and necessary renovations into one loan.
- VA cash-out refinance loan. If you already have a VA home loan and need to complete necessary repairs, the cash-out refinance option can help.
- VA energy efficient loan. You can use this loan to finance up to $6,000 of energy efficiency improvements. But you’ll need to use a VA loan or VA cash-out refinance to pursue this option.
- Fannie Mae HomeStyle Renovation loan. Like other options, this loan allows you to roll renovation costs in with your home purchase.
- Freddie Mac CHOICErenovation. Like the Fannie Mae loan above, this equivalent loan type from Freddie Mac enables you to include renovation costs in your purchase loan amount.
If a VA renovation loan isn’t right for you, one of these options might be.
VA renovation loan FAQs
Can VA loans include renovation costs?
VA home loans can include renovation costs if you pursue a VA rehab loan. With this unique loan type, you can fund necessary repairs to your property.
Can I use my VA home loan to remodel my house?
The VA home loan alone won’t allow you to use the funds to remodel your house. But the VA rehab loan will allow certain repairs and renovations. These approved uses are designed to improve the condition of your home to meet the VA’s minimum property standards.
A few ways you can use the VA rehab loan include repairing your roof, repairing your floor, replacing electrical or plumbing equipment, repainting to replace led paint, repairing the foundation, and making energy-efficient upgrades.
What is a VA rehab loan?
A VA rehab loan allows you to buy a fixer-upper and provides the funds for necessary repairs within a single mortgage. Although there are limitations on how you can spend the renovation funds, this is a viable way to make a property a livable home.
Does the VA do renovation loans?
The Department of Veterans Affairs is a government agency that offers VA rehab loans that can be used to fund select renovations. But keep in mind that the renovations must fall onto a relatively narrow list of approved repairs.
Finding a VA renovation loan lender
The VA renovation loan is a good option for some homebuyers, but the biggest drawback is that it can be difficult to find a lender that offers the program.
The best way to find a lender that’s willing to offer this type of loan is to check with multiple lenders.