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.
If you're eligible for a VA loan, you can purchase and repair a fixer-upper with a VA rehab (also called a VA renovation) loan, which lets you roll repair costs into your mortgage.
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. It also 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.
There are also limits on the types of renovations or improvements you can do. You can only use the money for improvements related to accessibility, functionality or safety, such as:
VA rehab loans work similarly to a regular VA loan, but come 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 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 loans, including VA rehab loans, have requirements borrowers must meet to be eligible. These include military service and a certificate of eligibility (COE), and:
For a VA rehab loan, borrowers are also required to have the repair work finished within 120 days from the closing of the loan.
For the most part, getting a VA home renovation loan follows the same process and has the same requirements as getting a VA home loan. You need a minimum 620 credit score and must live in the home as a primary residence.
One difference is that you have to get quotes for the repairs from VA-registered contractors. You also need a VA appraiser to determine the value of the home after repairs. Those factors impact how much you can borrow.
Lenders may also have set maximums for renovation costs. For example, they may offer to lend the value of the home pre-renovation plus no more than $50,000 to use for renovations. Even if you could find $100,000 worth of renovations to do and those improvements would boost the home value, the lender may stick to that limit.
You can get a VA rehab loan by following these steps:
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.
Keep these other pros and cons of VA renovation loans in mind:
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:
If you're eligible for a VA mortgage, a VA rehab loan can be a great way to turn a fixer-upper into a fantastic place to live. Just keep in mind that you'll need to work with VA-approved contractors and deal with additional paperwork and bureaucracy throughout the process.