Buying a Fixer Upper with a VA Loan in 2023: What You Need to Know

Purchasing a fixer upper home can be an attractive option for buyers looking to get more house for their money Making repairs and renovations yourself allows you to add value and customize the property But financing these types of homes takes some extra planning.

In this comprehensive guide, we’ll cover:

• Is it Possible to Use a VA Loan on a Fixer Upper?
• Tips for Buying a Fixer Upper with a VA Loan
• Using a VA Renovation Loan for Repairs
• Alternatives Like FHA 203(k) Loans
• Steps to Take Before Buying a Fixer Upper
• Estimating Repair Costs and Valuing Properties
• Securing Financing and Managing Construction

Understanding your options for purchasing and repairing a fixer upper home with a VA loan helps you create a realistic plan and budget

Is it Possible to Use a VA Loan on a Fixer Upper?

Yes, it is possible to use a VA loan to purchase a fixer upper home. However, there are a few important things to keep in mind:

• The property must meet VA minimum property requirements and be safe, sanitary, and structurally sound.
• Renovations and repairs cannot already be underway when you purchase with a VA loan.
• You’ll need a plan in place for financing repairs along with the purchase.

VA guidelines prevent using these loans on homes with extensive repairs already started. And lenders want to see a plan for renovations before approving a fixer upper purchase.

This means coordinating construction costs and timing into your VA loan. Let’s look at your options for financing repairs.

Tips for Buying a Fixer Upper with a VA Loan

Purchasing a home in need of upgrades takes extra planning. Here are tips for successfully buying a fixer upper with a VA loan:

• Inspect early: Thoroughly assess required repairs and costs as soon as possible. You don’t want surprise issues after closing.

• Find flexible financing: Look for loans that allow you to finance purchase and repairs in one loan.

• Get multiple bids: Interview several contractors and get multiple repair estimates.

• Factor in delays: Leave room in timelines and budgets for unexpected delays and costs.

• Manage carefully: Closely oversee contractors, payments, and progress to avoid problems.

• Have a backup plan: Be prepared to cover costs if construction goes over budget.

Securing the right financing option is key to buying a fixer upper with minimal hassle. Let’s look at your VA loan options.

Using a VA Renovation Loan to Finance Repairs

A VA renovation loan potentially allows you to combine the purchase and repairs into one mortgage. Here’s how they work:

• The loan amount is based on the home’s expected value after renovations.

• An appraiser estimates this “as-completed” value after reviewing your repair plans.

• The loan funds both the purchase and costs to renovate the home based on this projected value.

• All work must generally be completed within 90 to 180 days of closing.

VA renovation loans provide one simple method to buy and repair a home in tandem. However, these loans can be difficult to find and have tight requirements.

For example, repairs are limited to improving function and livability – not luxury upgrades. And builders must be VA approved. Given the challenges, other options likely make more sense.

FHA 203(k) Loans: A Viable Alternative

Since VA renovation loans can be hard to come by, an FHA 203(k) loan may be a better pick for financing your fixer upper.

FHA 203(k) loans are government-backed mortgages that allow you to roll repairs into your purchase, just like a VA renovation loan.

Benefits of using an FHA 203(k) loan include:

• More lenders offer them than VA renovation loans.
• Can finance more extensive repairs than allowed with VA renovation loans.
• Qualify with a 580+ credit score.
• Only 3.5% down payment required.

Drawbacks are higher mortgage insurance and more tedious paperwork. But 203(k) loans give you another viable loan choice for purchasing and repairing a home.

Now let’s walk through the key steps to take before committing to a fixer upper.

Steps to Take Before Buying a Fixer Upper Home

Purchasing a home in need of work requires extra diligence upfront:

1. Set your budget – Determine the maximum purchase price plus estimated repair costs you can afford.

2. Find potential properties – Look for homes well below market value in your target locations.

3. Assess repairs needed – Make a list of required updates and rough costs for each fixer upper you view.

4. Interview contractors – Talk with local contractors experienced in home renovations to start getting accurate repair estimates.

5. Compare loan options – Determine if a VA renovation, FHA 203(k), or other loan works best for your financials and project.

6. Consult lenders – Discuss the feasibility of your plans with potential lenders early in the process.

Doing this due diligence upfront prevents headaches later in the process. Accurately estimating renovation costs is especially crucial.

How to Accurately Estimate Renovation Costs on Fixer Uppers

Coming up with an accurate budget for needed renovations takes research:

• Get multiple quotes – Talk to at least 3 contractors and get their written repair estimates.

• Factor in contingencies – Add 10-20% to your total budget as a buffer for unforeseen issues.

• Consider do-it-yourself savings – If tackling any repairs yourself, deduct those costs.

• Compare acquisition costs – Look at what similar “turnkey” homes sell for to gauge if the project makes sense financially.

• Assess future value – Conservatively estimate the after-repair value of the home using comps.

Basing your loan amount and offer price on realistic figures prevents ugly surprises down the road. Speaking of value, let’s look at appraising fixer uppers.

Appraising Fixer Uppers for a VA or FHA Loan

With VA and FHA loans, an appraiser must evaluate the home’s current condition but also its expected value after renovations.

• For a VA loan, the appraiser gives an “as-is” value plus a projected “as-completed” value.

• FHA appraisers determine the home’s current value plus calculate the “subject to completed value.”

• The loan amount is based on the lower of the purchase price plus rehab costs or the “as-completed” value.

• The current value sets the maximum loan amount on its own if repairs would not change the property value.

This process helps ensure the property will appraise for at least the loan amount after renovations.

Now let’s review how to manage the construction process with your VA or FHA renovation loan.

Managing Construction and Payments on Your Renovation Loan

Once purchased, finishing repairs on time and within budget takes diligence:

• Review plans with contractors – Ensure everyone understands the scope of work and timeline expectations before getting started.

• Inspect progress regularly – Oversee work frequently to guarantee quality and prevent any deviations.

• Stick to draw schedules – Release payments per the draw schedule as work is completed up to specs.

• Maintain records – Keep detailed records of all payments, change orders, inspections, and correspondence.

• Act on issues ASAP – Address any concerns immediately to prevent small problems from ballooning.

• Communicate with lender – Keep your loan officer updated on progress to avoid complications.

Following this process helps ensure your fixer upper becomes the comfortable, valuable home you envisioned on schedule and on budget.

The Bottom Line

While purchasing a fixer upper home with a VA loan is possible, it requires coordinating financing for both acquisition and renovations. VA renovation loans allow this, but can be difficult to obtain. An FHA 203(k) loan is often the easier route.

Either way, accurately estimating repair costs, securing financing, managing the renovation process diligently, and budgeting for contingencies is vital for success when buying a home needing repairs. But put in the hard work upfront, and you can add value and customize your home while also securing a great deal.

Common Questions About Buying a Fixer Upper with a VA Loan

Can you buy a fixer upper with no money down?

Yes, VA loans allow 0% down to purchase a fixer upper home. FHA loans only require 3.5% down. The key is properly budgeting enough to cover both the purchase and needed repairs.

How much does a VA renovation loan cost?

The exact costs depend on your specific loan amount, credit, and required repairs. But in general, costs are comparable to a regular VA purchase loan. The only addition is potentially higher appraisal and inspection fees.

Do contractors have to be VA approved for a renovation loan?

With a VA renovation loan, yes the contractors must be VA accepted to do the work. For FHA 203(k) loans, contractors do not need any special approval.

Can you move into a home while renovations are in progress?

Typically, no. With a VA or FHA renovation loan, all work must be complete with proper permits and inspections before you move in. Temporary occupancy during work is usually not allowed.

How long do you have to complete renovations on a VA renovation loan?

VA guidelines require all work to be finished within 90 to 120 days from loan closing in most cases. FHA 203(k) loans allow up to six months for repairs.