VA Home Improvement Loan: 4 Options for Military Borrowers
Backed by the Department of Veterans Affairs (VA), a VA home improvement loan can help eligible military borrowers buy a fixer-upper or make improvements to their existing property. There are four different types of VA loans for home improvement, and each one allows you to roll the cost of your renovations into your purchase or refinance loan — so you’ll only have one monthly payment to fit in your budget.
4 VA home improvement loan options
1. VA energy-efficient mortgages
The VA allows you to roll the cost of certain energy-efficient improvements — like insulation or solar panels — into your purchase or refinance loan. But there are some details to consider:
- In most cases, you can borrow up to $6,000 for these renovations — however, the approval process will vary based on the estimated cost of improvements.
- Under $3,000: The lender will approve the costs using any documented bids that you submit.
- Between $3,000 and $6,000: The lender will approve costs based both on bids and whether the increased mortgage payment will exceed estimated utility cost savings.
- Over $6,000: Your loan application will be subject to extra scrutiny. You’ll have to provide documentation of the VA’s valuation of the improvements.
- It’s possible to do this work yourself and borrow money to cover the material costs.
2. VA renovation loans
The VA also guarantees alteration and repair loans to help you fix or upgrade your property. Potential renovations typically include projects like roofing, floors, foundation and electrical, HVAC and plumbing systems. You can access financing during the purchase or refinance process.
- VA alteration and repair purchase loan: Unlike a traditional VA loan, a VA-registered appraiser will determine the value of your home after renovations are complete, allowing you to roll the purchase price and cost of renovations into one large loan. While convenient, you will be limited to alterations that are in line with other structures in your community, and you’ll be required to provide written approval before each loan disbursement to your builder or contractor (who must also be registered with the VA).
- VA alteration and repair cash-out refinance loan: If you already own your home and have built up some home equity, you may be able to cover the cost of improvements with a VA alterations and repair cash-out refinance loan. This version of the VA alteration and repair loan also allows you to borrow up to the estimated appraised value of the home. You’ll just replace your existing mortgage with a bigger one and use the difference to cover repairs (though you’ll be beholden to similar requirements as the purchase loan).
Whether a purchase or refinance loan, your lender may charge a construction fee worth up to 2% of the loan amount. This fee would be added to your closing costs in addition to the VA funding fee and any origination fees from the lender.
3. VA cash-out refinance
With a regular VA cash-out refinance loan, you’re still accessing your home equity by swapping your current loan for one with a larger amount and taking the difference in cash. However, you can only access the value of your home as-is, not including future repairs or renovations. While a lower amount, you won’t face the same restrictions as a VA alteration and repair cash-out refinance — you can use the funds however you see fit.
Notably, you can also turn a non-VA loan into a VA loan with a VA cash-out refinance.
4. VA supplemental loans
VA supplemental loans are used to ensure your home’s basic livability, which means that you can only use the funds for essential improvements. They can’t be used for unnecessary upgrades, like getting a pool. However, as long as the project is eligible, the funds can either be added to the balance of an existing VA loan or made into a separate lien on the home.
Here’s what to know about VA supplemental loans:
- No more than 30% of the loan amount can be used on items like cooking, refrigerating, heating or washing equipment. In addition, anything you buy must be related to the main improvement or the reason why you took out the loan in the first place.
- If your loan is less than $3,500, you need only submit a “statement of reasonable value” from a VA-approved appraiser.
- If the loan is more than $3,500, you’ll need to obtain a “notice of value,” which is based on an appraisal, and arrange for inspections.
How to apply for a VA home improvement loan
Now that you’ve seen your options, the next step is to learn how to get a VA loan. In general, the process will include the following steps:
- Determine your eligibility: With VA loans, your eligibility is tied to your military service. Each day you serve counts toward your VA entitlement, which informs the guarantee that the VA makes to your lender.
- Learn about the requirements: VA loans don’t have as many qualifying requirements as other loan programs, but there are still a few VA loan requirements that you’ll have to meet. For example, you can’t be in default on any federal loans.
- Shop around for a VA-approved lender: Not every lender will be experienced in handling VA loans. It’s a good idea to look for one that’s very knowledgeable about various VA loan programs and offers competitive VA loan rates. For best results, get a few different loan estimates before making your final decision.
- Gather your financial documents: While you’ll still need the typical loan documents like W-2s and bank statements, you’ll also need to get a Certificate of Eligibility (COE) from the VA.
- Go through the loan application process: Once you find a home you love, you’ll work with a lender to start the application process and eventually close on the loan.
Pros and cons of VA loans for home improvement
While VA home improvement loans have many advantages, they may not be the right fit for every renovation project. Take a look at some of the pros and cons of these loans to help you weigh your decision.
| Pros | Cons |
|---|---|
Simpler qualifying requirements: VA loans have no down payment requirement and no formal minimum credit score requirement. (However, individual lenders may impose their own credit minimums.) Shorter waiting period after foreclosure: The waiting period to buy another property after a foreclosure can vary according to your loan program. Conventional loans have a waiting period of seven years — for the VA, however, it’s only two years. Potential to waive funding fee: The VA funding fee can be waived in certain situations, especially those involving service-related death or disability. Mortgages are assumable: VA loans are assumable mortgages, which means a new buyer can take over your existing loan. | Strict service requirements: You’ll need to complete a certain amount of military service in order to get a VA loan. The time frame can vary depending on your type of service and circumstance, but it can range from less than 90 days to six years. Limited lender pool: Not all lenders offer VA loans and fewer have experience with VA loans for home improvement — as such, finding an experienced lender may take some extra legwork. Added funding fee: The VA charges an added funding fee for most borrowers. This fee can range from 0.50% to 3.60% of the loan amount. Imposed use restrictions: There are some limits to how the funds from VA renovation loans can be used. In particular, any improvements you make must be similar to those found in comparable homes nearby. |
Alternative options for renovation loans
If you decide that taking out a VA home improvement loan isn’t right for you, there are plenty of other options available, including:
FHA 203(k)
An FHA 203(k) loan may be a good match for those who want to buy a fixer-upper and roll the renovation costs into the purchase loan. It can also be used if you already own a home and want to refinance your loan to make improvements.
You have two FHA 203(k) loan options:
- Limited 203(k) loan: This type of loan is used for minor, nonstructural repairs costing up to $35,000.
- Standard 203(k) loan: Meanwhile, this loan is meant to finance major projects that cost at least $5,000. Be aware that, in this case, you’ll have to hire a specialized consultant to oversee the work.
FHA Title I loan
If you’re a low- to moderate-income homeowner who needs to make essential improvements to your home, you might qualify for an FHA Title 1 loan. These are backed by the federal government and designed to help make your place more livable. They also cover manufactured homes.
You can borrow up to $7,500 without collateral, and up to $60,000 using your home as collateral. However, unlike a VA alteration and repair loan, an FHA Title 1 loan can’t be used for any kind of cosmetic or luxury upgrades.
Conventional renovation loans
A Fannie Mae HomeStyle® Renovation loan combines the purchase price and renovation costs of your home into a single loan product. If you can qualify, it may be an attractive option: It offers several features that VA renovation loans don’t, including the option to roll mortgage payments into the loan if the house isn’t currently habitable, as well as the possibility of down payment assistance.
Meanwhile, the Freddie Mac CHOICERenovation loan is another option that allows you to roll the cost of renovations and your home purchase or refinance into one loan.
Both this loan and the Fannie Mae loan only require you to make a 3% down payment, but you’ll need to have a credit score of at least 620 to qualify.
Home equity loan or HELOC
A home equity loan or a home equity line of credit (HELOC) are both types of second mortgages that will let you tap into the equity you’ve built by making your monthly mortgage payments. A home equity loan is a lump-sum, fixed-rate loan, while a HELOC is a revolving credit line that can be drawn on for a certain time period before repayment on your principal balance begins.
You’ll typically need at least 15% equity in your home to use these options. In contrast, the VA may guarantee a home renovation loan without regard to equity. However, some individual lenders may set limits for an acceptable loan-to-value ratio.