VA renovation loans, sometimes called home improvement or rehab loans, offer a valuable financing option for veterans looking to make significant changes to the home they’re purchasing or already live in. This comprehensive guide will explore the different types of VA home improvement loans available and help veterans find the right loan for their renovation goals.
What is a VA Renovation Loan?
A VA renovation loan allows veterans to finance both the purchase or refinance of a home and the cost of desired renovations. It’s perfect for buying a fixer-upper or upgrading your existing property to better suit your needs. By combining the purchase or refinance loan with renovation funds, veterans can avoid the hassle of seeking separate financing for home improvements. This can be a crucial advantage in high-priced markets where “turnkey” properties are out of reach, even with 100% financing available. Buying a house that needs some elbow grease can be much more affordable.
With a VA rehab loan, you can get the necessary funds to purchase the property and make the needed improvements. Typically, buyers would have to pay all cash for the purchase and then find additional funds for repairs or secure an additional source of financing.
The challenge with these specialized VA loans is that it can be difficult for veterans to find a lender making them in the current economic environment.
How VA Renovation and Rehab Loans Work
VA renovation loans let you combine the home’s purchase price and repair costs into one loan. The total amount you can borrow is based on the estimated “as-completed” value of the home after repairs. This value is determined by one of two options:
- Total Acquisition Cost: The price of the home plus the repair cost quotes.
- Appraisal: A VA appraiser reviews the repair estimates and determines the future value of the home.
Both will require itemized quotes from a contractor. The final “as-completed” value will be the lower of these two options.
For example, if the home’s sale price (including closing costs) is $150,000 and renovations cost $25,000, the total acquisition cost is $175,000. If the VA appraiser values the home with renovations completed at $180,000, the as-completed value will be $175,000 since it’s the lesser amount. In a case like this, the buyer benefits because they’re getting a $180,000 house for a total of $175,000.
If the appraiser values the home with renovations less than the total acquisition costs, the amount you can borrow will be less than the total cost of the home and renovations. In those cases, you may need to renegotiate the purchase price, revise renovation plans, or cover the difference out of your own pocket. Discuss these options with your lender to find the best solution.
How Are VA Renovation Loans Different Than Standard VA Loans?
Standard VA loans and VA renovation loans are essentially the same, with the same eligibility requirements, no down payment, and no private mortgage insurance (PMI). However, the renovation component comes with an added set of expectations, which we’ll discuss below.
The major difference between VA home loans and VA rehab loans is the loan process itself. VA rehab loans are more complicated due to the steps needed to improve the property after closing. With a regular VA loan, you close on the property, move in, and get on with your life. With VA rehab loans, you close on the property, wait while renovations are completed, and then move in. It’s a more formal process than typical property rehab programs on TV, but since you’ll use a builder or contractor under lender supervision, the process should go more quickly. Use a regular VA home loan for move-in ready properties, and a VA rehab loan for properties needing some TLC.
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VA Renovation Loan Eligibility Requirements
VA renovation loans share the same eligibility requirements as standard VA loans, but with some added requirements due to the nature of the added renovations. To be eligible for a VA renovation loan, veterans must:
- For all VA loans:
- Obtain a valid Certificate of Eligibility (COE)
- Use the property as a primary residence
- Pass a VA appraisal and meet all minimum property requirements (MPR)
- For Rehab loans specifically:
- Renovations must improve the liveability, use, and safety of the home
- All construction must be completed within 120 days of your closing date
- Contractors must have a valid VA builder identification number
It’s crucial to work with a VA-approved lender who can guide you through the application process and ensure you meet all the necessary eligibility requirements. If you’re refinancing, your loan-to-value ratio must be 90% or less, and you must have been in the home for at least a year.
Credit and Income Requirements
VA loans have flexible credit and income requirements:
- Credit: There is no minimum credit score requirement, but you need clean credit for at least the past 12 months. Individual lenders may have their own credit score minimums, typically between 580 and 620. If you had a Chapter 7 bankruptcy or a foreclosure, you must have at least two years of clean credit to be eligible.
- Income: The VA doesn’t set a maximum debt-to-income ratio (DTI) for VA loans. Lenders will have their own in-house guidelines for this. VA loans also consider what’s called residual income, which is basically a look at monthly discretionary income once major debts get paid.
VA Renovation Loan Limits and Terms
VA loans don’t have a maximum loan amount. Qualified veterans can borrow as much as a lender will extend. If you’ve used part of your entitlement before, loan limits are based on the county where the property is located.
For example, if a veteran’s home is appraised at $250,000, but the purchase costs $150,000 and improvements cost $50,000, the borrower should expect a loan value of $200,000. If you do not have full entitlement, loan limits apply.
If a borrower does not have their full entitlement, meaning they have taken out a VA loan before and have not paid it off and sold the property, then loan limits are generally imposed based on the county where the property is located. These limits are not a cap on borrowing. Instead, they help the VA and lenders determine how much a veteran can borrow without a down payment. Find your loan limit in the 2024 VA loan limit guide.
The loan terms, including interest rates and repayment periods, vary among lenders, so it’s best to compare multiple lenders and choose the option that best suits your financial situation.
Want to learn more about VA loan entitlement? Check out our guide to VA loan entitlement here.
VA Rehab Loan Allowable Improvements
VA rehab loans can be used for various improvements to make your home more comfortable, efficient, and safe. Examples include:
- Roof repairs
- HVAC upgrades
- Plumbing and electrical work
- Flooring installation
- Energy efficiency enhancements
- Accessibility modifications
- Kitchen and bathroom remodeling
- Interior and exterior painting
Non-Allowable Improvements
While VA rehab loans are flexible, they don’t cover:
- Luxury items (e.g., pools, hot tubs, outdoor kitchens)
- Minor cosmetic work
- Non-permanent installations (e.g., portable items)
Check with your lender for a complete list of allowable and non-allowable improvements.
Pros and Cons of VA Renovation Loans
VA renovation loans share all the same benefits as standard VA loans and provide extra funding for needed improvements. However, they come with some unique cons, given their unique uses.
Pros
- No down payment
- Competitive interest rates
- Single loan for purchase and renovations
- Improved property value
- Flexible renovation options
- No private mortgage insurance (PMI)
Cons
- Difficult to find lenders that make them
- Limited to primary residences
- Rigorous appraisal process
- Funding fees
- Lengthy approval process
- Dependence on licensed contractors
- Escrow disbursements for renovation funds
Understanding these pros and cons can help you decide whether a VA renovation loan suits you.
VA Renovation Loan Types
Veterans have a variety of VA home improvement loan options available. These include:
- VA Renovation Loans
- VA Supplemental Loans
- VA Energy-Efficient Mortgages
Each loan serves a unique purpose, so understanding their differences is crucial for making an informed decision. Refer to the table below for guidance on what type of loan is best for your needs.
VA Renovation Loans |
VA Supplemental Loans |
VA Energy Efficient Mortgages |
|
| Purpose | To finance both the purchase/refinancing and the renovations of a home | To make improvements to an existing property | To make energy-efficient improvements |
| Eligibility | Veterans, active-duty service members, and some surviving spouses | Veterans, active-duty service members, and some surviving spouses who already have a VA home loan | Veterans, active-duty service members, and some surviving spouses |
| Loan Amount | Based on the appraised value of the property, including renovation costs | The lesser of the appraised value of the property or the cost of improvements | The lesser of the appraised value of the property or the cost of energy-efficient improvements |
| Types of Improvements Allowed | Any improvements that are permanently affixed to the property and increase its value | Necessary improvements to make the property habitable, safe, and functional | Energy-efficient improvements, such as solar heating/cooling systems, insulation, and weather-stripping |
| Additional Requirements | Contractors must be VA-approved or meet VA standards | Borrowers must provide written estimates and plans for the improvements | Borrowers must obtain an energy efficiency rating and a cost-effective analysis |
| Loan Terms | Available as a purchase or refinance loan | Available as a supplement to an existing VA loan | Available as a purchase or refinance loan |
| Example Scenario | A Veteran purchases a fixer-upper and wants to finance both the purchase and renovation costs | A Veteran wants to add an extra bathroom to their existing home | A Veteran wants to install solar panels to make their home more energy-efficient |
VA Energy Efficient Mortgages (EEMs)
VA EEMs help veterans finance qualified energy-efficient home upgrades. They have three cost tiers:
- Improvements up to $3,000: This tier is the easiest to get approved for. To qualify, you will generally need to provide a contractor bid or quote that itemizes the costs of the energy-efficient improvements. Additionally, you’ll need to provide manufacturer information for each product or component involved in the improvements. The increase in loan payments will typically be offset by the decrease in utility costs.
- Improvements $3,001–$6,000: In addition to the documents required for the first tier, you’ll also need to obtain an energy audit that shows a year’s worth of utility cost averages for your home. These documents will be reviewed to assess whether the proposed energy-efficient improvements will have a significant impact on reducing the utilities to a cost-effective level. The lender also must ensure that the increase in monthly mortgage payments isn’t greater than the reduction in utility costs.
- Improvements over $6,000: This tier is more challenging to obtain. Approval for this tier requires review and approval from both the lender and the VA. It’s important to note that financing the cost of acceptable energy efficiency improvements cannot be used to meet the minimum loan amount necessary for VA loans utilizing second-tier entitlement. In this tier, the lender will exercise discretion and consider whether the increase in monthly mortgage payments outweighs the likely reduction in monthly utility costs. They will also assess the applicant’s income to ensure it is sufficient to cover the higher loan payment.
VA Energy Efficient Mortgage Eligible Upgrades
Eligibility requirements are the same as other VA loans. Veterans must obtain a home energy assessment to determine potential energy savings. Only certain improvements are eligible, such as:
- Solar panels
- Solar heating and cooling systems
- Caulking and weather-stripping
- Furnace efficiency modifications
- Clock thermostats
- New insulation
- Storm windows or doors
- Heat pumps
- Vapor barriers
Ineligible improvements include A/C units, new roofing or shingles, cosmetic upgrades, and kitchen or bathroom remodeling.
Find the VA Loan That’s Right for You
VA renovation loans and energy-efficient mortgages offer valuable financing options for Veterans looking to improve their homes. By understanding the eligibility requirements, loan limits, and terms associated with each loan type, Veterans can make informed decisions and choose the right loan to achieve their renovation goals. Working with a VA-approved lender will ensure a smooth loan application process and provide guidance throughout your renovation journey.
Ready to make your dream home a reality? Check your eligibility for a VA loan today and take advantage of the incredible benefits available to you as a Veteran. Whether you’re looking to buy, renovate, or make essential home improvements, a VA loan can provide the support you need.
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