What is a VA repair loan?
A VA renovation loan is a type of mortgage that finances both the home you want to buy and the cost of home improvements and renovations, or that allows you to refinance and renovate your current home.
VA loans are backed by the U.S. Department of Veterans Affairs and are available to those who serve in the military or have been honorably fired (and surviving spouses). VA loans do not require a down payment or mortgage insurance and many lenders offer these. However, not all VA Lenders are offering VA repair loans, and the few that do may have temporarily put them on hold last year.
How VA Loans for Rehab and Renovation Work
A VA Rehabilitation Loan funds the expected value of the home after the improvements and renovations are completed. This amount is based on your contractor’s estimates, which will be assessed by the appraiser. The contractor must be a VA approved professional.
Let’s say Martha bought a house for $ 200,000, and the contractor named the renovation $ 30,000, and the total cost was $ 230,000. If, after checking the estimates, the appraiser thinks the home is worth $ 210,000, she can finance that amount (assuming it meets other requirements for a loan). If the appraiser valued the house at $ 240,000, she would still only be able to finance $ 230,000.
VA Rehabilitation Loan Requirements
VA loans, including VA rehabilitation loans, have a number of requirements that borrowers must meet in order to be eligible for assistance. This includes military service and Certificate of entitlement (COE), and:
- Credit rating 620 or higher
- The intention to live on the property as the primary residence
To qualify for a VA rehabilitation loan, borrowers must also complete renovations within 120 days of the loan closing date.
Acceptable home improvements and renovations
In general, home improvements you make with a VA rehabilitation loan should improve the accessibility, functionality, and safety of the property, such as upgrading your HVAC or plumbing system, new insulation, or removing mold. Cosmetic or luxury renovations are generally not considered an acceptable improvement.
Alternatives to VA Rehab Loans
Finding a mortgage lender which offers a VA repair loan can be a daunting task, so if you are struggling to find one, consider one of the following alternatives:
- 203 (k) loan – This type of FHA loan only requires a 3.5% discount and can help you pay both the cost of the home and the cost of the renovation. Unlike a VA renovation loan, the amount you can finance is limited to 110 percent of the home’s appraised value (the lesser of the “before” or “after” Renault value) and you will need to pay your mortgage insurance. However, if necessary, it can take up to six months to complete the work.
- HomeStyle Credit – A HomeStyle Fannie Mae loan allows you to buy and renovate a property, with funding limited to 75 percent of the ‘after’ assessed value. It is noteworthy that this type of loan can be used for investment property or a second home.
- Permanent building loan – A loan from construction to permanent is also a one-time loan, but you will probably pay a higher interest rate. there is VA Construction Loans with less stringent underwriting, which might work if you have a lower credit rating.
- Loan secured by equity capital – If you already own a home, have equity and want to renovate it, you can get a home equity loan of up to 80 percent (sometimes more). This type of loan has a fixed interest rate and is usually repaid over five to 30 years.