VA Renovation Loans: A Guide To Funding Home Improvements

Finding a fixer-upper to make your own may be your dream project, but securing the financing to fund it might be harder than you think. Fortunately, if you’re an eligible active-duty service member, National Guard personnel, reservist, veteran or qualifying surviving spouse, you could qualify for a VA renovation loan.

In this article, we’ll explain what a VA renovation loan is, how it works and the pros and cons of using this type of financing. Our friends at Rocket Mortgage^® don't offer VA renovation loans, but we’ll discuss some alternatives you can also consider.

What Is A VA Renovation Loan?

A VA renovation loan (also known as a VA rehab loan) is a mortgage that is backed by the Department of Veterans Affairs. It includes both funding for the purchase of the home and certain types of repairs.

A VA renovation loan can also be used to refinance the borrower’s current mortgage while providing the cash needed for home improvements.

A VA home loan is a great option for eligible buyers because there is usually no down payment, no private mortgage insurance requirement, and it typically has a lower interest rate than a conventional loan.

How Does A VA Renovation Loan Work?

A VA renovation loan works just like a standard mortgage, except that your loan amount will be calculated based on a VA-approved contractor’s quote. Your lender will also schedule a home appraisal of the property to get a professional opinion for the value once the renovations are complete.

In the vast majority of scenarios, the VA doesn’t set a loan limit. However, the loan will never be for more than the property is worth after renovations. Also, even if the VA doesn’t specifically set a loan limit, lenders are free to set their own policies regarding maximum loan amounts or how much of the value can come from renovations.

For example, let’s say you wanted to buy a home for $200,000, and the lender you're using has a $70,000 renovation limit. Thankfully, you only need $60,000 for repairs, so your loan amount would be $260,000 if you’re approved.

Unfortunately, the VA appraiser visited the home and using your contractor’s estimate, calculated the property’s post-renovation value at $250,000. Your lender will now only give you a loan for $250,000: $200,000 for the house, and $50,000 for the improvements.

If you decide you want to do more renovations, you might have to pay the extra $10,000 out of pocket. This could significantly add to your closing costs.

Can You Use A VA Loan For Any Type Of Renovation?

Another limitation of a VA rehab loan is that you can only make repairs that improve the livability, accessibility or safety of the home. For instance, you can replace the HVAC system, widen doorways or replace the roof, but you wouldn’t be allowed to alter the floor plan or install a hot tub since those changes would qualify as structural or luxury upgrades.

You also aren’t allowed to make the repairs yourself as the lender will require a VA-approved contractor to do the work. So, if you’re hoping to work on a fixer-upper yourself, you might want to go with a different loan type.

VA Renovation Loan Requirements

While a VA renovation mortgage is a great loan option for some potential homeowners, there are requirements that will need to be met in order to qualify. Before you begin the application process, make sure you have the following:

• Certificate of eligibility (COE): To qualify for any type of VA loan, you’ll need to first prove you meet the minimum service requirements by providing a COE. If you don’t have one, you can apply for a copy.

• Minimum credit score: For most lenders, a credit score of 580 is enough to qualify, but some may accept lower.

• Reliable source of income: As with any lender, the borrower needs to be gainfully employed or self-employed to ensure they can make their monthly mortgage payments.

• Eligible property: VA loans can only be used to buy a primary residence, so the house can’t be a vacation home or investment property. The required repairs must also be within the lender’s renovation cost limits.

You’ll notice that there is no minimum down payment required for a VA loan. That’s because you can use a VA loan with 0% down. You also won’t need to pay for private mortgage insurance (PMI), but you will have a VA funding fee instead, though it’s significantly less than most PMI payments.

Who Offers VA Renovation Loans?

Many lenders, like Rocket Mortgage, don’t offer VA renovation loans because they offer more popular alternatives. Other lenders, like traditional banks and credit unions, may not have enough experience working with renovation loans in general, so they forgo this loan product altogether.

If you’re set on using a VA renovation loan, you might be able to locate a lender by speaking with your closest VA regional office and asking for a list of VA-approved lenders. You might also need to spend time interviewing local mortgage providers to see if any of them offer this form of financing.

VA Renovation Loan Pros And Cons

Before you decide on a VA renovation mortgage, you should first weigh the pros and cons of using this loan program.

Pros Of Using A VA Loan For Renovations

As you’ve probably guessed, there several advantages to using a VA rehab loan, such as:

• You can often finance the entire purchase without a down payment.

• You can save money by not having to pay private mortgage insurance.

• You could receive a lower interest rate compared to other types of home loans.

• It might be easier to find a home that needs repairs than one that is move-in ready.

• You only have to make one mortgage payment, compared to using a separate home improvement loan where you’d have two.

• The property value could increase more than expected once your renovations are complete.

Cons Of Using A VA Loan For Renovations

While there are less disadvantages of using a VA loan to make improvements, there are still some considerations you should take before applying, including:

• It could be difficult to find a lender who offers VA renovation loans.

• You may want to make more expensive repairs that exceed your lender’s renovation cost limit.

• The repairs you want to make may not qualify.

• You might want to do the renovations yourself to save money.

How To Get A VA Renovation Loan

Now that you know more about using a VA rehab mortgage and its benefits, you may be ready to submit an application. Even though the approval system may be different than a conventional loan, it’s fairly straightforward.

You can use these simple steps to streamline the mortgage process:

1. Find a lender that offers a VA renovation loan. This step may be time-consuming since most VA lenders don’t use this method of financing, but with some research, you should be able to locate one.

2. Ensure you have the appropriate paperwork. To speed up the process, you should gather all of the documents needed for preapproval before you fill out the application. 

3. Hire a VA-approved contractor. Your lender will require you to get a quote from a licensed and approved contractor to document how much the desired renovations will cost.

4. Get the VA appraisal. The appraiser will determine the estimated value of the property so the lender can calculate your total loan amount.

5. Close on your new home. With the final amount of the loan approved, you can close on your mortgage.

6. Complete the repairs. Once you have taken possession of the property, you have 120 days to do the renovations.

7. Schedule the last inspection. Since VA homes must meet certain guidelines for health and safety, your lender will require one last inspection to make sure the property meets the minimum requirements.

VA Renovation Loan Alternatives

Besides submitting an application, you can also take the time to learn more about the other options that are available. You’ll be happy to know that there are several types of loans or refinancing you can use to renovate your home.

VA Cash-Out Refinance Loan

If you want more freedom with your home renovations to make larger charges or use high-end building materials, a VA cash-out refinance may be the right option. Although, you’ll have to purchase your home first and build up equity allowing you the resources to complete your desired renovations before you can refinance. 

FHA 203(k) Loan

Similar to a VA loan, an FHA loan is insured by the Federal Housing Administration, which means it comes with benefits like lower interest rates and less strict credit score requirements. The FHA 203(k) loan also covers the cost to make repairs and renovations once the home is purchased. However, most lenders will require a 3.5% down payment and mortgage insurance. Rocket Mortgage doesn’t do these loans.

Fannie Mae Homestyle^® Renovation Mortgage

Another popular alternative is the Fannie Mae Homestyle^® Renovation Mortgage. This program gives buyers up to 75% of the post-renovation property value to put toward renovations. You can also use this loan on investment properties and second homes, but you’ll need a 3% down payment. Rocket Mortgage doesn’t offer this option at this time.

Home Equity Loan

For current homeowners, a home equity loan or home equity line of credit (HELOC) allows you to convert your built-up home equity into cash, which can be used on pretty much anything. There are no limitations on the type of repairs or upgrades you can make to your property using the money your lender gave you.

Keep in mind, a home equity loan or HELOC acts as a second mortgage on your house, so you’ll have two monthly payments until the loan is paid off. At this time, Rocket Mortgage offers home equity loans, but not HELOCs.

The Bottom Line

The VA renovation loan was designed for active duty service members, National Guard personnel, reservists, veterans or surviving spouses who wanted an affordable option to buy and repair their homes. This type of VA loan also allows home buyers to avoid private mortgage insurance and high interest rates without making a down payment. However, it can be difficult to find a lender or stick to the renovation cost limits.

No matter what type of renovation loan you decide to go with, it’s important to be fully prepared for the home buying process. To learn more about what options are available to you, take the opportunity to check your credit score  and find ways you can improve it.