VA Renovation Loans: Are They Worth It for Veterans?

$41,600 is the home renovation costs in the US. For most people with small-to-medium-sized homes, the cost often rises to $62,000. That’s a hefty amount! This is where VA renovation loans can help.

VA renovation loans benefit veterans by financing their home purchases and associated repairs. Like standard VA loans, they allow you to buy a home with no money down, no mortgage insurance, and significantly lower interest rates.

As you consider these benefits, it’s important to browse different government loan programs and choose a mortgage lender. You can look for lenders online with Houzeo.

What Is a VA Renovation Loan?

A VA renovation loan, also called a VA rehabilitation loan, was introduced by the Department of Veterans Affairs in 2018. It’s a special type of VA loan that helps you buy and renovate a fixer-upper.

It is a combination of two loans:

• Home Purchase Loan: This loan helps you finance the purchase of your home.
• Home Improvement Loan: This covers the renovation costs to get your property in the best shape.

If you want to finance your home without renovations, consider a regular VA loan. This allows you to finance your home while enjoying VA benefits.

How Is a VA Renovation Loan Different From a VA Loan?

VA renovation loan differs from a VA loan in 3 major ways:

How Do VA Rehab Loans Work?

Here’s how VA renovation loans work:

1. Collect and Submit Project Estimates: First, you need to get project estimates from a VA-approved contractor. Then, submit those to your mortgage lender.
2. Consult an Appraiser: You must connect with an appraiser for home appraisal to know the after-renovation value.
3. Apply for a Loan: Consult your mortgage lender to arrange financing. Your loan amount will be based on the post-renovation appraisal or contractor’s estimate, whichever is lower.

After getting the loan approval, you need to get the work done within 120 days of closing. Furthermore, your lender would disburse the loan as the renovation progresses.

🌟Can You Make Cosmetic Repairs? No, you cannot make any cosmetics upgrade using the loan amount. However, you can conduct any repairs that improve your home’s accessibility and functionality. Some of these include new insulation, removing lead paint, and weatherization.

How Much Does a VA Renovation Loan Cost?

The cost of a VA renovation loan includes 3 components:

• Interest Rates: VA renovation loan has competitive interest rates. These are usually between 3.5% – 5.5% depending upon the market conditions and your credit score.
• VA Funding Fee: The VA funding fee differs according to your circumstances. If you’re a first-time buyer with no down payment, the fee is around 2.15%. For subsequent uses, it’s approximately 3.3%.
• Closing Costs: These are fees associated with processing the loan, such as title insurance, appraisal fees, recording fees, and more. They range from 2% to 6% of the loan amount.

🚨Note: Please note VA renovation loans do not require PMI (private mortgage insurance), even with a low or no down payment. This is a major benefit, saving borrowers hundreds of dollars per month.

What Are the Qualifications for a VA Renovation Loan?

To qualify for a VA renovation loan, you must meet military service requirements and have a valid certificate of eligibility.

Here are 6 specific VA renovation loan requirements:

• You should have a credit score of at least 650.
• You must intend to make the home your primary residence after making necessary repairs.
• The repairs you make must enhance your home’s livability, use, and safety.
• Ensure your contractors and builders have a valid VA builder identification number.
• Your home construction and associated repairs complete within 120 days of closing the loan.
• Your property should pass the appraisal and inspection requirements of VA.

How Do You Get a VA Rehab Loan?

Here is a 5-step process to get a VA rehab loan:

1. Obtain COE: Get your certificate of eligibility (COE) from the VA eBenefits portal. You can also email the VA COE request form to your regional loan center.
2. Get Pre-approved: Find an experienced lender to help you secure a VA renovation loan. After selecting your lender, request pre-approval to obtain proof of financing for making offers.
3. Hire a Contractor: Select your desired property that matches VA standards. Post that, hire a contractor to estimate necessary repairs.
4. Submit Project Estimates: After your offer is accepted, your lender will order an appraisal to determine the after-repair value of your home. Submit your renovation estimates to the lender for review.
5. Close on the Loan: Once your lender approves, start with the renovation process.

Pros and Cons

Here are the pros and cons of VA renovation loans:

👍 Pros

• No Down Payment: VA renovation loans don’t require a down payment. This makes them more accessible than conventional loans.
• Lower Interest Rates: Interest rates for VA renovation loans typically range from 2% to 6%. This is lower than the average of 7% on conventional loans.
• No Private Mortgage Insurance: VA renovation loans do not require any private mortgage insurance. As a result, your monthly costs are on the lower side.
• Flexible Property Types: Eligible veterans can use a VA renovation loan to purchase various properties. These include small homes, condos, and duplex houses.
• Increased Home Value: Renovations funded by a VA loan could raise your home’s value. This is because your renovation costs are included in your loan amount.

👎 Cons

• Strict Property Requirements: Properties bought through VA renovation loan must meet VA standards. This could limit your options.
• Limited Renovation Options: There are some restrictions on the type of renovations allowed. Therefore, customization might not be an easy task.
• Market Value Concerns: Over-renovating the home may not add enough value to justify the cost. It could potentially affect your return on investment.

Alternatives to a VA Renovation Loan

If you’re unable to get a VA renovation loan due to reasons like strict property standards, extensive renovations, etc., consider the following options:

• Personal Loan: This is an unsecured loan that can help you with home renovations. However, interest rates on personal loans are significantly higher i.e. 8% – 36%.

• Home Equity Loan: You can borrow money against your home value with a home equity loan.
• Cash-Out Refinance: This option requires sufficient home equity. You can refinance your existing mortgage for more than you owe and use the extra cash for renovations.

Is a VA Renovation Loan Worth It?

Yes, a VA renovation loan can be valuable for veterans. It helps them buy and improve a home’s condition with favorable terms such as no down payment, competitive interest rates, and no PMI.

However, it’s important to consider the potential drawbacks. VA renovation loans have strict property and renovation requirements, complicated processes, and upfront costs like the VA funding fee.

Overall, it’s wise to assess your specific needs and financial situation beforehand. Consulting with a knowledgeable VA-approved lender can also help determine if this loan type is right for you.

Find the Best Mortgage Lenders With Houzeo

Houzeo gives buyers access to 140+ lenders across the U.S. Start your mortgage journey now!

Frequently Asked Questions

• VA Loans