You’re a service member or veteran eager to purchase a home. But you’re on a tight budget and likely will need to buy a diamond-in-the-rough property you can rehab. Where can you turn for financing?
The Department of Veterans Affairs (VA) has a renovation loan that funds a home’s purchase price as well as the cost to repair it into one fully amortizing, fixed-rate mortgage. You won’t have to pursue two separate financings — one for the mortgage and one for the renovations.
Or, say you already own a home that needs significant upgrades. Instead of shopping for a home equity loan, a home equity line of credit (HELOC) or a traditional cash-out refi, you can opt for a VA reno loan and use it to refinance your property and pay for the improvements.
It has all the benefits of a traditional VA loan, such as no down payment required, lower minimum credit scores and no mortgage insurance needed. Cash-out refinances and home equity loans typically have stricter standards.
“The VA renovation loan is an incredibly beneficial resource for any borrower who qualifies and is seeking to update and customize their next purchase or transform their existing property,” said Richie Duncan, a senior loan officer with VA Nationwide Home Loans (VANationwide.com), a VA renovation loan provider based in Overland Park, Kansas.
Rules and restrictions apply, of course. While guidelines differ from lender to lender, to be eligible for this loan vehicle, you typically must meet the following criteria:
- Be a service member or veteran who has served a minimum of 90 consecutive active-duty service days during wartime, 181 active-duty service days during peacetime or six service years in the National Guard, or be married to a service member who died in the line of duty or from a service-related disability.
- Obtain a valid Certificate of Eligibility.
- Use the home as your primary residence. The home cannot be a multi-unit or mixed-use property, condo, demolished/raised/relocated, co-op, investment property or mobile home on leased land. Existing built homes, foreclosures and short sale homes are eligible.
- Not exceed a maximum renovation cost of $100,000.
- Choose a repayment term of 10, 15, 20, 25 or 30 years.
- Possess a minimum credit score, typically between at least 580 and 620.
- Not exceed a loan-to-value ratio of 90% (of the appraised value) if this is a refinance loan.
- Not exceed a debt-to-income ratio of 50% in most cases.
- Hire a general contractor/subcontractors to do the work. (Borrowers cannot do the renovations themselves.)
- Begin work within 30 days and complete all work within 120 days of the loan’s closing.
- Apply the funding toward renovations that are not structural or regarded as luxury items. Among the eligible improvements are those that eliminate health and safety risks; connecting to public water and sewer systems; repairing or replacing plumbing, HVAC and/or electrical systems; making changes for improved functionality and modernization; replacing a worn roof; making energy conservation improvements; and enhancing accessibility for persons with disability.
“If you need to make significant structural improvements, such as changing support beams, doing foundation work, building an addition and moving walls that require new load-bearing beams, this loan is not applicable,” Duncan said.
