VA Renovation Loans: A Veteran’s Guide to Buying and Renovating a Home

The VA Renovation Loan provides financing to help veterans purchase and renovate properties that require updates and fixes. One great thing about shopping for a fixer-upper is that it widens your net. A home that’s been passed over because it’s a bit unfinished can be a hidden — and lower-priced — gem.

VA does not offer these loans directly; you get them through private lenders. But a major benefit is that the VA backs these loans. That means they guarantee a portion of the loan, so there’s less risk for the lender, and the lender can offer better terms to the veteran who is applying — similar to an FHA loan.

For example:

• No down payment is required. VA mortgages offer one of the only no-money-down home financing options available in the marketplace.
• Low mortgage rates. VA loans typically offer competitive interest rates, which can save you money over the life of the loan.
• No mortgage insurance. Most low down payment home loans, such as FHA loans, have some kind of monthly mortgage insurance. VA home loans don’t. There is a one-time VA funding fee that can be reduced if you do decide to make a down payment or even waived if you meet certain criteria.

Let’s take a look at how these loans came to be, how they work, and some of their pros and cons.

What is a VA loan?

The VA home loan program has its roots in the Servicemen’s Readjustment Act of 1944, conceived to ease postwar readjustment for returning service members right after World War II.

The program almost immediately began evolving to keep up with veterans’ needs and postwar real estate. By 1945, his was no longer “immediate readjustment aid.” It was a long-term housing program.

For decades, these loans could only purchase a home, and veterans couldn’t use them to make repairs to the homes they bought. However, in 2018, in response to the “aging housing stock in the United States,” loans for alteration and repair were made eligible under VA loans.

Enter the VA Renovation Loan.

How does a VA Renovation Loan work?

A VA Renovation Loan is a home loan with additional funding (up to $50,000) rolled in for rehab to the home. You can buy the fixer-upper and get funding to fix it up with a single loan — and a single monthly mortgage payment.

If you already own a home and have lived in it for a year, you can still apply for a VA Renovation Loan. Since you already own, “the transaction would be structured as a cash-out refinance,” according to Cornelius Pierce, Public Affairs Specialist with the U.S. Department of Veterans Affairs. “The lender would then disburse the renovation funds to the contractor as the renovations are completed.” 

Tip

If you already own a home and have lived in it for a year, you can still apply for a VA Renovation Loan.

A cash-out refinance means you negotiate a new mortgage, including the additional funding from the loan, which you repay with a single monthly payment.

Who is eligible for a VA loan?

There are three main requirements to qualify for a VA-backed home loan:

• Certificate of Eligibility (COE). This establishes your service history and duty status.
• Standards for credit and income. VA doesn’t set a minimum credit score but relies on lenders to decide if an applicant is a good risk. Again, the fact that these loans are backed by VA will mitigate the risk a lender sees in you. VA lenders typically require a score of 620, but this can vary.
  
  Similarly, there is no specific minimum income required, but your debt-to-income ratio should max out at 41%. This is the percentage of your monthly income that goes toward paying off your debts.
• Permanent residence. You must live in the home as your permanent residence. This is not a loan to buy a house for a relative or to rent out.

Note that surviving spouses of deceased veterans may also be eligible for VA home loans.

Tip

Surviving spouses of deceased veterans may also be eligible for VA home loans.

You found a home. Now what?

Your next several steps require you to tap into VA-specific resources:

• Find a lender who offers VA Renovation Loans. Not all lenders do, so make sure you’re selecting from loans that fit your needs.
• Get an estimate from a VA-registered contractor. Contractors are “not approved by VA,” but they need to “register with VA to obtain a VA Builder ID number.” The contractor will estimate the cost of the improvements you want to make to the home.
• Get an appraisal from a VA-approved appraiser. An appraiser will take these planned improvements into consideration and look at the property to “make sure the home is worth at least what you’ve offered to pay for it” and to ensure that it’s “safe, structurally sound and sanitary.”

Pierce explains, “the maximum loan amount would be limited to the as-completed value of the property” (the post-improvement value, as estimated by the appraiser). Your loan will only finance up to the post-improvement value the appraiser calculates or the total cost of the home plus the contractor’s estimates, whichever is lower.

What can you do with a VA Renovation Loan?

There are limits on what a VA Renovation Loan can be used for. As a rule of thumb, the funding is for utilitarian improvements to make the home livable, not for luxury items, décor, or nice-to-haves like a pool or a barbecue pit.

As the VA Lenders Handbook puts it, the loan is not to be used for “repairs of cosmetic items, items involving minor deferred maintenance or normal wear and tear, or items that are inconsequential in relation to the overall condition of the property.”

Think along the lines of:

• Repairing the roof, electrical wiring or flooring.
• Replacing the HVAC or plumbing.
• Weatherizing, eradicating mold or removing lead paint.
• Adding ramps and other accessibility features.

A couple more rules: 

• You must use VA-registered contractors to do the work (this isn’t for do-it-yourselfers).
• The home must be your primary residence.
• The work must be completed within 120 days. (According to Pierce, VA “does not set a maximum amount of time,” but a 120-day limit may be the result of lenders having “more stringent timeframes due to investor requirements.”)

If you’re a qualifying veteran with an eye on a house that needs some TLC, a VA Renovation loan is an excellent opportunity.

The pros of VA Renovation Loans

• VA-backed, allowing lenders to offer better terms.
• No down payment required.
• Competitive interest rates.
• Emphasis on fixer-uppers means a wider choice of lower-cost homes.
• A single loan — and a single monthly payment — lets you buy the house and make improvements.
• The loan amount is tied to the potential assessed value of the home post-renovation.

The cons of VA Renovation Loans

• Not all lenders offer them.
• Must use VA-registered contractors and appraisers.
• Improvements limited to those that establish livability.

What are some alternatives to a VA Renovation Loan?

There are many financing options for home improvements. Some are veteran-specific, and some are open to all.

VA cash-out refinancing 

Recall that an HA Renovation Loan, applied to a property you already own, functions as a cash-out refinance. So what’s the difference between that and a “VA Cash-Out Refinance”?

Pierce explains that a VA Renovation Loan allows you to close on a home “even if the property doesn’t meet VA’s minimum property requirements,” but a VA Cash-Out Refinance means “the home would have to meet VA’s minimum property requirements at the time of closing.” It won’t cover the purchase of a fixer-upper, so you can fix it.

On the plus side, the VA Cash-Out Refinance does not limit how the veteran can use the cash. Use it for that swimming pool.

VA supplemental loans

These can be used only for utilitarian livability improvements, and only veterans with an existing VA loan on the property can apply. “They cannot use their VA eligibility to borrow for repairs being made on homes with paid-off loans or on homes that weren’t purchased with a VA-backed loan.”

Note also that you don’t need an appraisal for a VA Supplemental Loan if you borrow less than $3,500. 

Non-VA, government-backed options

These are similar to VA Renovation Loans: government-backed programs to help a buyer purchase both a home and the work required to renovate it. They also require a credit score of around 620 and have similar restrictions to VA loans: only work intended to make the home more livable.

• FHA 203(k) Loans. Instead of being backed by the VA, these are backed by the Federal Housing Administration (FHA). Unlike VA loans, they do require mortgage insurance and a down payment of 3.5% of the cost of the home plus the renovations.
• Fannie Mae HomeStyle Renovation Loans. These are backed by the Federal National Mortgage Association (FNMA — pronounce it out loud!). They require mortgage insurance and a down payment of 5% (3% with a HomeReady Mortgage).

Non-government-backed options

Home equity loans and home equity lines of credit are tied to your home’s equity (the amount of your home’s value you actually own). That means you have to own a home already, including around 20% of its value in equity. These aren’t for buying your first fixer-upper.

No government agency backs these up. Instead, your home is collateral. This mitigates your risk to lenders so they can offer attractive financing. The interest rates tend to be under 10%.

The bad news is that you could lose your home if you can’t make payments.

Important

You could lose your home if you can’t make payments on non-government-backed options

A home equity loan is a lump-sum loan amount. A home equity line of credit (HELOC) is an amount from which you can borrow as much or as little as you need and pay it back with interest. Both options are “second mortgages” that you pay off with another monthly payment. 

Note that you can use a home equity loan or a HELOC for anything you want, whether it is home-related or not. 

Personal loans

Mike McGinley, VP of Lender Relationships at Acorn Finance, tells us that personal home loans “tend to cap out around $40,000.” And they’re fast. A homeowner could get pre-qualified same-day and “get that money in their bank account within a day or two,” he says.

These loans are not large enough to purchase and renovate a house, but if you need improvements to a house you already own, that money could go a long way. You can use it for whatever you want, whether it’s a roof repair or a barbecue pit.

A personal loan is also unsecured, meaning it doesn’t use your home as collateral. You won’t lose your home if you can’t make payments, but interest rates are higher, around 10-20%, with strong credit.

How Acorn Finance can help you with your home

A veteran looking to buy and renovate a home can find a dynamic range of financing options from Acorn Finance. Share your financial needs, and a network of lenders will offer loans to fit your plans, your budget, and your dreams. Select your best option from VA Renovation Loans, personal loans, home equity loans, and more.

As a veteran, you deserve a home you will love. Let’s see how we can help.