If you’re a member of the military or a veteran looking to buy a home, VA loans can be a great option.
But there’s a hitch if you want to buy a fixer-upper – Your loan amount will be limited to the home’s current value.
Any improvements you want to make will not be included.
A VA renovation loan can take care of that hitch. It funds the renovations and repairs and lets you roll that cost into your original mortgage.
Quick warning here: there are more hoops to jump through with a renovation loan.
Here’s what you need to know.
What Is a VA Renovation Loan?
A renovation loan is a type of VA home loan that finances the house you plan to buy and the cost of fixing it up.
Nobody wants to buy a house and sleep under a leaky roof. The Department of Veterans Affairs recognized this problem in 2018 and came up with renovation loans that make it possible to fix problems.
The Difference Between VA Loans and VA Renovation Loans
A regular VA loan finances only the market value of a home. A renovation loan lets you add up to $50,000 in repair costs.
You’ll have to get itemized estimates from VA-registered contractors for the improvements you plan. Then a VA appraiser will review the estimates and determine what your home’s value will be when the work is completed.
A renovation loan will finance up to the amount the appraiser says the house will be worth, or the cost of the home plus the estimates from the contractor, whichever figure is lower.
For instance, if the home is priced at $250,000 and renovations cost $28,000, the total cost would be $278,000. But if the appraiser says the value will be $283,000, you’d still only be able to finance $278,000.
No, it’s not as simple as getting a regular VA loan. But renovation loans come with the benefits of VA loans, like no down payment and lower interest rates than civilians can get.
Requirements for VA Rehab and Renovation Loans
Applicants must first meet one of the basic VA loan qualifications, such as having served 90 consecutive days during wartime or181 days during peacetime. The specific loan requirements for a rehab or renovation loan are:
- The renovations must improve the home’s livability, use and safety.
- The home must be your primary residence.
- Construction must be completed within 120 days of the closing date.
- The contractors and builders must have valid VA builder identification numbers.
- The home must pass the VA appraisal and meet all inspection requirements.
Allowable Home Improvements
Renovation loans are supposed to be used for real problems, not luxury upgrades. If you want to add a jacuzzi or a marble sculpture of your favorite commanding officer, you’re out of luck.
You’re in luck if you have needs like these:
- Plumbing repairs
- Electrical repairs
- Roof repairs
- Energy efficiency upgrades
- HVAC malfunctions
- Flooring repairs
- Upgrades to meet disability requirements
Types of VA Home Improvement Loans
There are three types of home improvement loans. Assess your home repair needs and your budget to decide which option is best for you.
VA Home Renovation Loan
As noted earlier, a regular VA loan amount can’t exceed the home’s current value. A renovation loan lets you include up to $50,000 to be used on repairs and other upgrades.
That gives you more options when you’re looking at houses, but there are downsides. You’ll have more paperwork and hoops to jump through, like finding accurate repair bids from VA-approved contractors.
You can’t do the repairs on your own, no matter how handy you are with a hammer and saw. Lenders can be tougher to find and could charge construction fees of up to 2% of the loan amount.
VA Supplemental Loan
These loans can be added to an existing VA mortgage to improve your home’s livability, or they can be structured like a second mortgage and paid separately. Given inflation, that might mean a higher interest rate on the second loan.
These loans must be used to improve the basic needs of the property, like broken plumbing. They can’t be used for extravagances like a new fire pit or waterfall for the pool.
And no more than 30% of the loan can be used for “maintenance, replacement, improvement, repair, or acquisition of non-fixtures or quasi-fixtures such as refrigeration, cooking, washing, and heating equipment.”
VA Energy Efficiency Loan
If your home could use thermal windows or solar heating, this could be the loan for you. It covers projects that improve your home’s energy efficiency. These loans aren’t freestanding and must be part of home purchase or refinancing.
Among other items that qualify would be storm windows and doors, HVAC upgrades, insulation, and heat pumps. Pretty much anything that impacts your utility bill is fair game.
The loan limit is $6,000. If the project costs more than that, you’ll need to get a VA Certificate of Commitment. There’s more paperwork, but you are allowed to DIY – Do It Yourself – when it comes to tackling the projects.
Not having to use a contractor can save you a lot of money. Just be sure you know what you’re doing, or you could pay a big price in frustration.
Pros and Cons of VA Home Improvement Loans
A renovation loan offers a lot of benefits, but – and there’s always a but – there are drawbacks that must be considered. Here are some pros and cons.
- It expands your home choices. If you can’t find a move-in ready home you like, you can look into a fixer-upper that suits your budget.
- As with all VA loans, you’ll probably get a lower interest rate than civilians can qualify for, along with other benefits like no mortgage insurance. Rolling the renovations into your mortgage also means you’ll have only one monthly payment.
- The loan amount is based on what your home’s value will be after it’s all fixed up, not what it’s worth before repairs.
- A lot of lenders don’t offer home improvement loans, so you might have to do a lot of hunting.
- You can’t make unapproved repairs or use the money for luxury items.
- Repair costs can’t exceed what the contractor estimated. If there’s an overrun, you’d have to pay for it at closing.
How to Apply for a VA Renovation Loan
It’d be nice if you could just make a phone call and have all the legwork for a loan taken care of. Sadly, life and lending doesn’t work that way. Here’s the process for getting and completing a renovation loan.
- Get your Certificate of Eligibility (COE), which is required for any VA loan.
- Find a lender and get pre-approved. That can be a pain, since many lenders don’t offer VA rehab loans. They require more paperwork and monitoring than regular VA home loans, so many lenders don’t feel it’s worth the trouble.
- Find the right home. Keep in mind that renovation loans only cover repairs to make the home more livable. Luxury renovations like a new indoor basketball court do not qualify.
- Get quotes from a VA-registered contractor.
- Get a VA-certified appraisal. The appraiser will determine the value of the house once renovations are completed. You can borrow that amount, or the sale price of the home plus estimated repairs, whichever is lower.
- Close the loan and let the renovations begin.
- Final inspection. A VA appraiser will inspect the completed project and confirm it meets all loan requirements.
Alternatives for VA Renovation Loans
When it comes to home loans, you are not bound by an oath to the military. You are free to explore options beyond those offered by the VA. They include:
- Home equity loan or line of credit (HELOC): If your home is worth more than you owe on your mortgage, you can borrow up to 80% of that difference, sometimes more. You get a fixed interest rate, and the loan term is usually between five and 30 years.
- FHA 203(k) loan: It lets you buy or refinance a home and roll renovation costs into the mortgage. The down payment on this VA home refinancing can be as low as 3%.
- Fannie Mae Homestyle loan: It’s basically a conventional home renovation loan. You need a higher credit score than you need for an FHA 203(k) loan, but rules about renovation work are more flexible.
- VA Energy Efficiency loan: As noted earlier, this loan covers the cost of energy-related improvements.
- Specially Adapted Housing Grant: It’s another VA option that pays for home improvements to accommodate a disability. These grants can also cover renovations to a caretaker’s home.
About The Author
Tom Jackson focuses on writing about debt solutions for consumers struggling to make ends meet. His background includes time as a columnist for newspapers in Washington D.C., Tampa and Sacramento, Calif., where he reported and commented on everything from city and state budgets to the marketing of local businesses and how the business of professional sports impacts a city. Along the way, he has racked up state and national awards for writing, editing and design. Tom’s blogging on the 2016 election won a pair of top honors from the Florida Press Club. A University of Florida alumnus, St. Louis Cardinals fan and eager-if-haphazard golfer, Tom splits time between Tampa and Cashiers, N.C., with his wife of 40 years, college-age son, and Spencer, a yappy Shetland sheepdog.
- N.A. (ND) VA Home Loans. Retrieved from https://www.benefits.va.gov/homeloans/
- N.A. (ND) Cash-out refinance loan. Retrieved from https://www.va.gov/housing-assistance/home-loans/loan-types/cash-out-loan/
- Forster, N. (2023, June 8) How to Refinance a VA Loan. Retrieved from https://money.com/how-to-refinance-a-va-loan/
- Langone, A., Watt, K. (2023, March 23) Best Ways to Use Your Home Equity for Remodeling Projects. Retrieved from https://www.cnet.com/personal-finance/home-equity/advice/best-ways-to-use-your-home-equity-for-remodeling-projects/