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October 30, 2020

What is a VA renovation loan? And where can I get one?

Erik J. MartinThe Mortgage Reports Contributor

November 16, 2020 - 8 min read

VA renovation loans: Buy and fix up a home with one loan

If you’re a veteran or service member and want to purchase a fixer-upper, you may be in luck.

That’s because, if you’re eligible, you could receive a VA renovation loan that will let you buy and renovate a home with no money down and at a great interest rate.

But finding a VA rehab loan lender might be tricky. And qualifying could be more difficult than you expect.

Look closely at a VA renovation home loan and learn how it works. And explore alternatives in case this option isn’t available to you.

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What is a VA renovation loan?

The VA renovation loan program lets you buy a house in need of repairs and fix it up — all with a single mortgage loan.

Like all VA mortgages, the VA renovation or ‘rehab’ loan offers extra-low interest rates and the opportunity to buy a home with zero down payment.

But this is not just a home purchase loan. Current homeowners can use the VA rehab loan to refinance a property they already own and plan to repair.

To be eligible for VA financing, you or your spouse need to be a veteran or active-duty service member.

Benefits of the VA renovation loan

“While traditional VA home loans simply finance the purchase or general refinancing of a home, a VA renovation loan has broader applicability,” says Wayne Brown, former Captain for the United States Air Force and director of business development at Pensioned American Retirement Company.

“That’s because a portion of the loan includes the expenses associated with renovating the property,” he explains.

“VA renovation loans can be used for refinancing purposes, but in this case they essentially serve as a supplemental loan to repair your property in addition to traditional VA refinancing.”

No down payment or mortgage insurance is required. And eligible borrowers can get a very low interest rate.

John Gluch, Realtor and founder of Gluch Group, says the benefits of a VA renovation loan are multiple.

For one, no down payment or mortgage insurance is required. And eligible borrowers can get a very low mortgage rate.

“Also, the borrower only has to worry about a single VA loan for their property instead of a purchase mortgage loan and a separate rehab loan,” notes Gluch.

“This allows for one convenient monthly payment and can be easier for budgeting and forecasting.”

How the VA renovation home loan works

A VA renovation loan is a single loan that combines a property’s purchase price with the related repair costs.

Borrowers can finance up to the “as-completed” value of the home, which is equivalent to the home’s post-improvement market value.

“To determine the ‘as-completed’ value, you must first get itemized improvement quotes from a contractor,” Brown explains.

“After that, a VA appraiser reviews the quote and makes a determination about your home’s future value. The loan value will always be the lesser of the total acquisition cost or the ‘as-completed’ value evaluated by the VA appraiser.”

If you’re using a VA rehab loan, the renovations on the home must be completed within 120 days of the date you closed the loan.

Or, if you are refinancing, you must have lived in the home for at least 12 months before you begin repairs.

VA rehab loan eligibility

To qualify for a VA rehab loan, you must meet several criteria.

First, you need a valid Certificate of Eligibility, which proves you’re eligible for a home loan backed by the Department of Veterans Affairs.

As Brown explains, eligibility typically means you meet one of the following criteria:

Served at least 90 consecutive active duty service days during wartime
Served at least 181 active-duty service days during peacetime
Served at least six service years in the National Guard
Or be a spouse of a service member who died from a service-related disability or in the line of duty

In addition to your VA loan eligibility, there are certain requirements for the home buyer and the property.

Bruce Ailion, a real estate investor, attorney, and Realtor, explains:

The home must be used as your primary residence
You cannot borrow more than the repaired value of the home
Any contractors you choose must be approved by the VA
And you typically need a 660 or better credit score

Lenders will also want to see reliable income and tolerable debt levels.

Not all repairs are covered

Additionally, it’s important to note that there are limits on the sorts of repairs you can do with a VA renovation loan.

“You are allowed to improve the existing structure,” says Ailion, “such as by adding a new roof, upgrading or replacing the plumbing or electric, installing new carpeting, improving accessibility, and making health, safety, and livability improvements to the home.”

But you won’t be allowed to completely gut the house and renovate it from top to bottom.

VA renovation loans cap repair costs at $50,000, and only certain types of renovations are allowed.

Nor can you make purely aesthetic upgrades, like buying fancy new countertops for the kitchen or installing a home theater.

“A VA renovation loan will not allow you to put on an addition, install a swimming pool or upgrade the landscaping,” Ailion says.

What’s more, your loan-to-value ratio cannot exceed 90 percent. And you have to live in the continental United States, so Hawaiians and Alaskans are not eligible.

Lastly, the maximum allowable repair limit is $50,000. So if your home renovations are likely to exceed this limit, you’ll have to look for another type of home improvement loan.

Check your renovation loan options (Jun 14th, 2022)

Good candidates for a VA renovation loan

You might be a good candidate for a VA renovation loan if:

You are a service member or veteran
You plan on remaining in your home over the long-term
Your home requires structural or safety improvements costing less than $50,000

On the other hand, if you plan to flip the home quickly or rent it out, the VA rehab loan isn’t for you.

“Borrowers aren’t allowed to use a VA renovation loan to fix and flip a house or for rental properties, as funds can’t be used for short-term investment opportunities,” cautions Brown.

Grant Moon, Major, U.S. Army, CEO of Home Captain, says this loan option is ideal for those who want to manage a project.

Moon says the VA rehab loan is “a good choice for someone who is budget-conscious yet willing to do the work on a property that has potential.”

Note, however, that you likely won’t be allowed to do the work yourself. Repairs must be done by a licensed, bonded contractor who also has a VA Builder ID number.

VA renovation loan lenders

One of the downsides of pursuing a VA rehab loan is that the repair costs are not guaranteed by the US Department of Veterans Affairs until all work is complete.

The lender is on the hook for up to $50,000 in renovation costs for weeks, maybe months. If the borrower defaults during the rehab process, the lender foots the bill.

“As a result, some lenders are not willing to take this risk on. So finding a private lender who offers VA renovation loans can be difficult. For example, not even Veterans United offers VA renovation loans,” says Brown.

He adds that VA Nationwide Home Loans, OVM Financial, and Homebridge Financial are among the VA lenders that do offer renovation loans.

“Regional options tend to exist, but you want to do your due diligence in the vetting process. It’s not like securing a loan with J.P. Morgan Chase or another large-scale lender,” says Gluch.

“For a referral, check with your unit or team’s family ombudsmen for more insight, as they tend to know the local market around your specific base better than anyone.”

Alternatives to a VA rehab loan

A VA renovation loan isn’t your only choice to buy a fixer-upper or improve your current home.

If you can’t find a lender, don’t qualify for this loan, or simply want to pursue alternatives, check out these options:

VA Energy Efficient loan — Can be used to finance up to $6,000 worth of improvements and repairs related to green initiatives or increased energy efficiency
FHA 203 (k) loan — Combines the purchase price of a home and the cost of renovations, just like a VA renovation loan. The FHA 203k rehab loan is a much more widely-available program; however, it includes upfront and annual mortgage insurance, which can be expensive
VA cash-out refinance loan — Allows you to tap into your equity to pay for home improvements
Fannie Mae HomeStyle Renovation loan — Like the VA rehab loan and FHA 203k rehab loan, Fannie Mae’s HomeStyle Renovation Loan includes the home purchase price and repairs within one mortgage. You must have a credit score of 620 or higher and at least a 3 percent down payment to qualify
Home equity loan or home equity line of credit (HELOC) — If you already own your home and want to make improvements, one of these ‘second mortgage’ options could offer the cash you’re looking for

Check your renovation loan options (Jun 14th, 2022)

Things to consider before buying a fixer-upper

Think carefully before rushing into any major financing decision.

“Consider how this decision fits into your budget. Taking on a home renovation and pursuing a property that needs work is not only a risk financially, but it also can cause a lot of stress and headache,” cautions Brown.

“That’s because coordinating projects and contractors can take up a lot of time, attention, and energy.”

“Make sure you are in a strong place mentally, financially, and emotionally before taking on a major home renovation project,” Brown suggests.

“It always costs more money to renovate a property than you think it will. So go into the process well-informed and with reasonable expectations” —Grant Moon, Major, U.S. Army and CEO of Home Captain

Also, think twice if you’ve never done major rehabs before.

“If you don’t have experience renovating properties, you can get in over your head quickly. And in general, it always costs more money to renovate a property than you think it will. So go into the process well-informed and with reasonable expectations,” recommends Moon.

Still, if you qualify and find a worthy property with strong potential, pursuing a VA renovation loan can be a smart move.

“This can be a great opportunity to build wealth. An older home can often be purchased at a discount. And a house that’s correctly fixed up can create a comfortable equity cushion,” Ailion adds.

Find the best renovation loan for you

A VA renovation loan can be a great way to finance home improvements at a low rate.

On the downside, VA renovation loan lenders can be very hard to find. So getting one may not be an option.

Fortunately, there are many other types of rehabilitation and home improvement loans on the market. So if you can’t find a VA rehab loan, you’re likely to have other good options.