What is the VA Renovation Loan?


Thomas Short
Military VA Loan contributor

The Aging housing stock in the United States has contributed to the increased demand for alteration and repair loans. Due to the condition of this aged housing, homes are often sold as “cash or conventional financing” which does not allow Veterans to use their VA earned benefit.” — Veterans Benefits Administration, Circular 26-18-6

For many homebuyers, move-in ready homes are hard to find. And, when they are available, the cost can be well above what a lot of homebuyers can afford. This makes fixer-uppers more appealing, but securing funds to pay for the work can be a challenge. In fact, historically, it was all but impossible to finance a house that did not meet habitability standards with a VA-backed home loan. That changed in 2018 when the VA introduced a renovation loan, also known as the VA home rehabilitation loan, that allows homebuyers to purchase a home and fund repairs and improvements.

The purpose of a VA renovation loan is to ensure that the home meets the minimum standards to qualify for VA financing. (The VA has minimum property requirements to protect the homeowner’s investment.) Because you’ll be securing a home loan before the repairs are made, getting loan approval is more of a process than with traditional VA loans. That said, once you’re done, you’ll have a purchased home with a VA loan to finance repairs.

If you are a veteran with sights set on a house in need of renovations to properly qualify for VA home financing, then pursuing a VA home improvement loan is your best bet.

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VA Home Improvement Loan Types

As of today, the VA offers three kinds of home improvement loans. You will want to analyze the specifics of your unique situation to determine which of the following VA home loan options will best suit your needs.

VA Refinance Loan For Home Renovations

This VA home loan is meant to be used for purchasing properties that do not and will not meet minimum habitability requirements at close. It allows veteran purchasers to factor in home renovation and rehabilitation expenses, though this number is often limited to anywhere between $50,000 and $75,000, depending on your lender.

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 cash-out refinance for what the value of the property is when fully repaired. This can help veterans whose homes may have lost value and currently owe more than the worth of their house.

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 be dragged out longer than you want.

There Are Limits. As mentioned above, VA renovation loans of this kinds 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 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.

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 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 that 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

The thing to understand about VA renovation loans is it’s 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 is rolled together with the original purchase loan — 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 need to 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.

Check your eligibility for a VA rehab loan.

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 to ensure the home is livable to meet 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.

Common improvements allowed by VA rehabilitation loans include: Roof repairs Floor repairs Electrical and plumbing repairs or replacements HVAC repairs or replacement Paint (if lead paint is currently in the home) Foundation repairs Energy-efficiency upgrades

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.

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.

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.

To ensure you receive a VA home improvement loan, it’s important to remember the following guidelines:

Loan Types. You must apply for a VA purchase or VA Cash-out Refinance in order to be eligible to fund your repairs with a VA renovation loan.

Minimum Property Requirements (MPR). All homes to be purchased with a VA loan must meet MPR as outlined by the VA. Rehabilitation loans must be used to fund repairs and/or renovations that bring the property up to these standards.

Contractor Requirements. You must use a registered VA builder or contractor for any property appraised for alteration and repairs.

Project Management. 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.

Acquisition Cost + Notice of Value. Rehabilitation loans used in conjunction with a home purchase must use the lessor of the acquisition cost or the as-completed value — this is called the Notice of Value (NOV) and is determined by a VA appraiser. To calculate the total acquisition cost for a 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.

Finding a 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.

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