You’re a service member or veteran eager to purchase a home. But you’re on a tight budget and likely will need to buy a diamond-in-the-rough property you can rehab. Where can you turn for financing?
The Department of Veterans Affairs (VA) has a renovation loan that funds a home’s purchase price as well as the cost to repair it into one fully amortizing, fixed-rate mortgage. You won’t have to pursue two separate financings — one for the mortgage and one for the renovations.
Or, say you already own a home that needs significant upgrades. Instead of shopping for a home equity loan, a home equity line of credit (HELOC) or a traditional cash-out refi, you can opt for a VA reno loan and use it to refinance your property and pay for the improvements.
It has all the benefits of a traditional VA loan, such as no down payment required, lower minimum credit scores and no mortgage insurance needed. Cash-out refinances and home equity loans typically have stricter standards.
“The VA renovation loan is an incredibly beneficial resource for any borrower who qualifies and is seeking to update and customize their next purchase or transform their existing property,” said Richie Duncan, a senior loan officer with VA Nationwide Home Loans (VANationwide.com), a VA renovation loan provider based in Overland Park, Kansas.
Rules and restrictions apply, of course. While guidelines differ from lender to lender, to be eligible for this loan vehicle, you typically must meet the following criteria:
“If you need to make significant structural improvements, such as changing support beams, doing foundation work, building an addition and moving walls that require new load-bearing beams, this loan is not applicable,” Duncan said.
Also, “you can’t borrow more than the combined cost of all your repairs,” said Eric Nerhood, owner of Premier Property Buyers, a real-estate flipping and investment firm headquartered in Seal Beach, California. “You must use VA-approved contractors only. You have to have verifiable income with tolerable debt levels. And you cannot purchase a house, gut it and renovate from the ground up.”
“Anyone who hasn’t accrued enough equity in their existing home, but for whom updates will make a huge difference, should strongly consider this — especially if you’ve been noticing home values increasing rapidly in your area and you want to keep pace and capitalize on the potential for substantial equity gains,” Duncan said.
Be forewarned, however: Finding a lender that offers a VA renovation loan won’t be easy, Duncan said.
“These are very involved loans. They require more documentation, multiple conversations, approving contractors and getting everyone to agree and meet closing time frames,” Duncan said. “Plus, in hotter markets, it can be more challenging to convince a seller to allow you to use this loan.”
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Purchasing a fixer-upper home can be an affordable way to buy real estate, especially in competitive markets where move-in ready homes are scarce and expensive. If you’re a military servicemember, veteran, or qualifying spouse, a VA renovation loan allows you to buy and renovate a fixer-upper while enjoying the many benefits of VA financing.
In this comprehensive guide, we’ll cover everything you need to know about using a VA loan to buy and remodel a home needing repairs, including:
- What is a VA renovation loan?
- VA rehab loan limits and requirements
- Pros and cons of buying a fixer upper with VA financing
- Tips for qualifying for a VA renovation loan
- Eligible and ineligible improvements
- Step-by-step process to purchase and remodel
- Alternatives like FHA 203(k) and more
Let’s get started!
What is a VA Renovation Loan?
A VA renovation loan, also called a VA rehab loan, lets you roll the purchase price and renovation costs into a single VA mortgage. Rather than taking out one loan to buy the home and a separate loan for repairs, the renovation loan combines them.
With a VA renovation loan
- You can finance up to $50,000 in repairs above the home purchase price
- Only one loan with one monthly payment is needed
- Low VA rates and fees apply to the combined loan amount
- No down payment is required
Essentially, this loan type gives you the funding to buy a fixer-upper and renovate it, while enjoying the advantages of a regular VA home loan.
VA Rehab Loan Limits and Requirements
VA renovation loans must meet certain limits and requirements:
- Borrower Eligibility – You must meet VA borrower requirements like service history, COE, and DTI limits
- Property Eligibility – Existing single-family homes and condos are allowed, not new construction
- Max Renovation Costs – Up to $50,000 above the purchase price
- Eligible Repairs – Must be necessary to meet VA minimum property standards
- Ineligible Repairs – Luxury upgrades like pools cannot be financed
- Loan Term – Typically 15 or 30 years
VA lenders will also assess your credit, income, assets, and debts to approve the renovation loan, just like a standard VA mortgage.
Pros of Buying a Fixer Upper with a VA Loan
Here are some of the biggest pros to doing a VA renovation loan on a home needing renovations:
- Low rates and costs – Enjoy VA loan perks like no downpayment or PMI
- Purchase and renovate – Combine acquisition and repair costs into one loan
- Livable home – Make repairs to meet VA minimum property standards
- Less cash needed – Roll renovation costs into loan instead of paying out of pocket
- One payment – Single monthly mortgage payment versus two loans
- Use loan entitlement – VA entitlement can be applied to purchase price and repairs
A VA renovation loan opens the door to buying dated or deteriorated homes by financing necessary updates.
Cons of Buying a Fixer Upper with VA Financing
There are also some potential drawbacks to be aware of with a VA renovation loan:
- Slower process – More steps and paperwork to buy and renovate
- Strict guidelines – Repairs must meet VA requirements
- Short timeline – Renovations must be completed within 6 months
- No luxury upgrades – Cannot finance pools, hot tubs, etc.
- No DIY work – Repairs must be done by licensed contractor
- Lower home value – Appraisal is based on current value before repairs
- One-time use – Entitlement gets used up with first-time use
While VA renovation loans provide great flexibility, borrowers do have to follow VA rules and timelines.
Tips for Qualifying for a VA Renovation Loan
To boost your chances of getting approved for a VA rehab loan, follow these tips:
- Shop lenders – Not all offer VA renovation loans so shop around
- Check credit – Shoot for a score of at least 620 or higher
- Lower DTI – Keep debt-to-income below 50% if possible
- Get cost estimates – Lenders want detailed renovation quotes and plans
- Find a VA contractor – Must be registered with VA to do work
- Know standards – Ensure repairs meet VA requirements
- Document income – Provide paystubs and tax returns to verify income
Meeting VA credit and income guidelines is key to successfully financing your fixer upper purchase.
Eligible Improvements for a VA Renovation Loan
The VA has strict rules on what types of renovations can be financed as part of a VA rehab loan. Here are some common eligible improvements:
- Heating and cooling system repairs or replacement
- Plumbing and electrical repairs
- Roof replacement
- Flooring repair or replacement
- Drywall and painting
- Kitchen appliance replacement
- ADA accessibility renovations
- Foundation repairs
- Termite or water damage repairs
Ineligible improvements include any unnecessary upgrades like luxury bathrooms, swimming pools, hot tubs, and additions. Talk to your lender about specific renovation plans.
Step-by-Step Process to Buy and Renovate a Home
If you want to purchase and remodel a fixer upper with a VA loan, follow these steps:
1. Get pre-approved – A lender will assess your income, credit, and service record to approve a loan amount.
2. Make an offer – Find the home you want and submit an offer contingent on obtaining financing.
3. Provide renovation quotes – Get detailed quotes from VA-approved contractors outlining repairs.
4. Complete VA appraisal – The lender will order an appraisal to confirm after-renovation value.
5. Close on the loan – Finalize paperwork and receive loan funding to purchase the property.
6. Begin renovations – Hire your contractor and start repairs after closing.
7. Complete renovations – All work must be done within 6 months of closing.
8. Request final inspection – The VA will inspect completed renovations to ensure they meet standards.
9. Enjoy your renovated home! – Move into your repaired home once the VA gives final approval.
This process allows you to buy and remodel a home within months using one VA renovation loan.
Alternatives to a VA Renovation Loan
If a VA rehab loan doesn’t work for your situation, here are some alternative options for buying and renovating a home:
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FHA 203(k) Loan – This FHA program also lets you combine buying with renovations. It may have lower credit score requirements than VA loans.
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FHA 203(h) for Disaster Victims – Special FHA loan that covers purchase price plus repairs up to $200,000 for homes damaged in a disaster.
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USDA Renovation Loan – For low-income borrowers purchasing in rural areas, this financing option from the USDA allows financing of repairs.
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Cash-Out Refinance – If you have sufficient equity, a VA cash-out refinance can provide funds for renovations.
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Home Equity Loan – Borrowers can tap home equity via a second mortgage to finance renovations separately from the purchase.
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Personal Loans – While not ideal, personal loans are an option for borrowing renovation funds.
Be sure to talk to a loan officer about all your options to finance revitalizing a fixer-upper home.
The Bottom Line
Purchasing a home needing repairs or upgrades can save you money upfront. And a VA renovation loan allows active military and veterans to buy and remodel a fixer-upper using one mortgage, combining the purchase price and up to $50,000 in renovations.
Just be sure to find a knowledgeable VA lender, get contractor estimates on eligible repairs, and realistically assess the costs. With the right planning, a VA rehab loan can help you affordably achieve the home of your dreams.
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Can I buy a fixer-upper with a VA loan?
FAQ
Can you get a fixer upper house with a VA loan?
Why do sellers not want buyers with VA loans?
Can a VA loan be used to remodel a house?
What property Cannot be financed with a VA loan?
How do I pay for a fixer-upper?
Borrow a conventional loan to cover the purchase of the home. Note: Some government-backed mortgages, like FHA and VA loans, have strict property requirements that make it difficult to close on a fixer-upper. Take out a home improvement loan, such as an unsecured personal loan or line of credit, to pay for your renovation project.
Can a VA loan buy a fixer-upper home?
Borrowers can use a VA loan to buy and renovate a fixer-upper home with the VA renovation loan, also sometimes known as a VA rehab loan. There are some guidelines about what kinds of home improvements can be financed, and borrowers must meet the VA’s eligibility requirements.
Can a VA loan buy a fixer-upper?
VA loans make homeownership possible for thousands of veterans and military service members every year. These loans have no down payment or mortgage insurance and often have lower mortgage rates than other home loans. Besides those well-known benefits, you can also use a VA loan to buy a fixer-upper or renovate your current home.
Can I buy a fixer-upper without a renovation loan?
If you want to buy a fixer-upper without the limitations of a renovation loan, there’s another common strategy to consider: Borrow a conventional loan to cover the purchase of the home. Note: Some government-backed mortgages, like FHA and VA loans, have strict property requirements that make it difficult to close on a fixer-upper.