To protect consumers using VA loans and ensure that the homes they’re buying truly are safe, sound, and sanitary, the U.S. Department of Veterans Affairs (VA) insists that all properties purchased with this type of funding must meet its Minimum Property Requirements. That doesn’t mean that you can’t buy a fixer-upper. However, if your heart is set on a property that requires some work to meet your wants and needs, learning how to use a VA home renovation loan should be at the top of your to-do list.
How to Use a VA Home Renovation Loan
There’s a shortage of affordable, turnkey homes in most housing markets (source). Adding fixer-uppers expands the pool, giving you more options and a chance to get more house for your money. If you intend to fund your home purchase with a VA loan, then exploring how to use a VA home renovation loan gives you a chance to learn what to expect and a sense of what you can accomplish with this form of financing.
The Advantages of Using a VA Home Renovation Loan
Using a VA home renovation loan offers some significant advantages (source). Like other VA loans, you’ll enjoy up to 100 percent financing, competitive interest rates, no requirement for private mortgage insurance, and limits on closing costs. You’ll also get the funds you need to complete renovations immediately without having to secure a second loan. One loan means one loan application, one interest rate, and one monthly payment.
The VA Home Renovation Loan Process
A renovation loan can be incorporated into a VA purchase loan or a VA cash-out refinance loan. As the VA explains in its handbook for lenders, the process for securing a renovation loan includes a few additional steps:
- The process begins with the lender verifying the borrower’s eligibility and determining that they qualify for the loan that they are seeking.
- The borrower selects a fixer-upper and chooses a VA-approved builder or contractor; the lender may set additional restrictions on the choice of contractor and must verify that the contractor is licensed, bonded, and insured.
- The scope of renovations is determined and an appraisal by a VA appraiser is ordered.
- The lender completes the underwriting necessary to approve the loan and makes sure that everything is in order.
- The VA appraiser provides a Notice of Value (NOV), or an estimate of what the home will be worth when the work is finished. When completing the loan, the figure used must be the lesser of the NOV or the acquisition cost.
- Closing is held, transferring ownership of the property to the borrower.
- The lender sets up a custodial escrow account for the renovation funding.
- The borrower pays the VA funding fee within 15 days of closing.
- The contractor begins the planned renovations. Funds are paid out by the lender as the progress is verified and approved by the borrower.
- The VA’s Minimum Property Requirements are met. If applicable, a Certificate of Occupancy is issued.
- The VA appraiser returns to complete a final inspection.
- The VA issues the guaranty for the loan and the borrower is able to move in.
Acquisition Cost Versus Value
The VA requires lenders to use the lesser of the acquisition cost or Notice of Value when calculating the loan. How are these figures determined? The Military Wallet reports that the acquisition cost is determined by adding the property’s purchase price; the expected cost of renovations; and any fees for permits, title updates, and inspections. A contingency reserve of up to 15 percent of the expected renovation costs can also be included at the lender’s discretion. In contrast, the NOV is determined by the VA-approved appraiser.
Using Renovation Funds
What can you do with the funds earmarked for renovations? As Bigger Pockets explains, you cannot make structural changes like adding an addition, installing a swimming pool, altering the property for commercial uses, or making any improvements that don’t conform to the neighborhood. However, that still leaves many possibilities, including the following:
- Installing new roofing, windows, doors, or siding
- Renovating kitchens or bathrooms
- Replacing the well or septic systems
- Repairing foundations or masonry work
- Updating electrical, plumbing, HVAC, and other mechanical systems
- Purchasing new appliances for a planned renovation
- Taking corrective actions like lead paint abatement or mold remediation
PrimeLending Twin Cities is proud to serve those who have served by providing VA home renovation loans. If you have questions about how to use a VA renovation loan, we would be happy to help you by providing accurate answers and expert guidance. To learn more, contact us today.