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Buying a home that needs a little TLC can frequently be cheaper than buying a home that doesn’t need any work, but paying for those repairs can be difficult. Luckily, if you’re a member of the military or served in the past, there’s a great way for you to finance renovations.
What is a VA renovation loan?
A VA renovation loan is a type of mortgage that finances both the home you’re looking to purchase and the cost of home improvements and repairs, or that allows you to refinance and fix up your current home.
VA loans are backed by the U.S. Department of Veterans Affairs and are available to those who are serving in the military or have been honorably discharged (and surviving spouses). VA loans do not require a down payment or mortgage insurance, and many lenders offer them. However, not all VA lenders offer VA renovation loans, and the few that do might have temporarily paused issuing them in the last year.
How VA rehab and renovation loans work
VA rehab and renovation loans work similarly to a regular VA loan, but with a few more steps. You’ll have to get estimates from a VA-approved contractor for the work you’d like to have done. An appraiser will then give an estimated value of the home after the proposed changes have been completed.
The VA rehab and renovation loan will only finance up to the amount the appraiser believes the home will be worth or the total cost of the home purchase plus the estimate from the contractor, whichever amount is lower.
Let’s say Jada bought a home priced at $200,000 and a contractor quoted the renovations at $30,000, for an all-in cost of $230,000. If after reviewing the estimates the appraiser believes the home’s value will be $210,000, she’d be able to finance that amount (assuming she meets the other loan qualifications). If the appraiser were to value the home at $240,000, she’d still only be able to finance $230,000.
VA rehab loan requirements
- A credit score of 620 or higher
- Intent to live in the property as the primary residence
For a VA rehab loan, borrowers are also required to have the repair work finished within 120 days from the closing of the loan.
Acceptable home improvements and repairs
In general, the home improvements you do with a VA rehab loan should improve the accessibility, functionality and safety of the property, such as HVAC or plumbing upgrades, new insulation or mold remediation. Cosmetic or luxury renovations typically aren’t considered acceptable improvements.
Pros and cons of VA renovation loans
Expanding your home search to include homes that need significant work can help you find a home quicker, especially in a real estate market with low inventory. However, in a hot local real estate market sellers may not be willing to wait or deal with the hassle of finding a contractor to get quotes for needed repairs and wait for appraisals when they could just sell to a real estate investor offering cash.
Here are other pros and cons of VA renovation loans to keep in mind.
- You can finance repairs for cheaper than alternatives like a personal loan.
- Allows you to put 0% down as opposed to a non-VA home improvement loan.
- You can save on the initial purchase price over a turn-key home.
- They’re only for livability repairs, not stylistic or cosmetic improvements.
- You’ll have to pay for the difference between the as-completed value and repair costs.
- Can be difficult to find a VA-approved contractor depending on your area.
Alternatives to VA rehab loans
Finding a mortgage lender that offers a VA renovation loan can be challenging, so if you’re struggling to find one, consider one of these alternatives:
- 203(k) loan – This type of FHA loan only requires 3.5 percent down and can help you pay for both the price of the home and the cost of upgrades. Unlike a VA renovation loan, the amount you can finance is capped at 110 percent of the appraised value of the home (the lesser of the “before” or “after” reno value), and you’ll need to pay mortgage insurance. However, the work can take as long as six months to complete, if needed.
- HomeStyle loan – Fannie Mae’s HomeStyle loan allows you to buy and fix up a property, with the amount of financing limited to 75 percent of the “after” appraised value. Notably, this type of loan can be used for investment properties or second homes.
- Construction-to-permanent loan – A construction-to-permanent loan is also a one-time loan, but you’ll likely pay a higher interest rate. There are VA construction loans that have less strict underwriting, which can be a fit if you have a lower credit score.
Home equity loan – If you already own a home, have some equity and want to make repairs, you can get a home equity loan worth up to 80 percent (sometimes more). This type of loan has a fixed interest rate and typically gets repaid over anywhere from five to 30 years.