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How to Finance Renovations with a VA Home Loan

Updated November 9, 2020
4 min read

Historically, the spirit of the VA home loan program has limited buyers to purchasing homes in turnkey condition. While the program has offered cash-out refinancing to make improvements and financing add-ons for energy efficiency upgrades, options for VA rehab or renovation loans have been scarce. Fortunately, recent changes to the VA loan have introduced more flexibility for military homebuyers looking to buy a "fixer-upper."

If you’re eligible for a VA loan, you now have options to either buy a fixer-upper with a VA loan, or to make improvements to a home you already own.

VA Renovation Loan

VA renovation loans are a relatively new option for military homebuyers. Until recently, it would have been impossible to buy a rehab property using a VA mortgage.VA renovation loans can be used to finance the cost of certain repairs and home improvements when you’re buying or refinancing a home.

There’s no stated limit to the cost of repairs for this type of loan, but you’ll have to keep your total financed amount below the home’s "as completed" value. In addition to the regular VA appraisal, your appraiser will assign a value based on what the home would be worth after undergoing renovation.

There are some other important VA renovation loan guidelines to note:

  • You must intend to occupy the home as your primary residence
  • Renovations must represent an improvement in the home’s value, utility and safety—improvements made just for the sake of appearance won’t fly
  • Contractors must have a valid VA builder ID
  • Improvements should be completed within 120 days of closing
  • An additional inspection after closing is needed to certify the improvements meet all VA requirements

This is a new product, and many lenders are hesitant to offer the VA renovation loan for home improvement. Still, assuming you can find a willing lender, the VA renovation loan may be your best option for rehabbing a fixer-upper with $0 down.

Homeowners who are unable to find a lender that can do a VA Renovation Loan may find their solutions in a VA Cash-Out Refinance loan. Cash-Out Refinances avoid the VA renovation guidelines and give you the freedom to choose how the cash is put to use.

VA Cash-Out Refinance

Assuming you owe less on your mortgage than your home is worth, a VA cash-out refinance is a good option for military homeowners looking to renovate their home. For VA cash-out refinancing loans, the rules are clear. Borrowers who have first liens are permitted to apply for cash-out VA refinancing loans and use the money back for any purpose "acceptable to the lender," including home improvements.

The borrower must have a "first lien" or mortgage on the property in order to apply for refinancing, which means veterans who own their home outright aren’t eligible.

Take the Next Step: Compare VA Cash-Out Refinance Lenders

VA Energy Efficient Mortgage

The VA energy efficient mortgage (EEM) program is a way for VA homebuyers to roll the cost of some repairs and updates into the purchase of their home. Energy efficient mortgage improvements can also be rolled into a VA streamline refinance.

Energy-Efficient Mortgage-eligible repairs are limited to changes that will reduce the home’s heating, cooling or electrical efficiency over time. The EEM is designed for minor improvements, and you’ll generally need to keep the cost under $6,000, so this isn’t a good option if you’re looking to buy a fixer-upper with a VA loan.

Energy efficient mortgage home improvements can include:

  • Insulation
  • Installing new doors and windows, or adding storm doors and windows
  • Solar features like water heaters and solar HVAC systems
  • Upgrades to more efficient HVAC systems
  • Adding thermostat timers
  • Adding heat pumps
  • Caulking and weather stripping

Depending on the cost of repairs and lender guidelines, you may need to provide some additional documentation, which will likely include a professional energy audit to certify the improvements will result in cost-savings over time.

Again, it’s important to note that funds secured through the EEM program are rolled into the total cost of the loan. This means you may be paying interest on this extra amount for the life of the loan. It’s always a good idea to look at all of your options before proceeding with an EEM. Many states and utility companies offer special programs and incentives that might be more beneficial. Big-box hardware and home improvement stores are also worth checking out.

VA Renovation vs. FHA 203(k) Loans

Unlike the VA renovation loan, you don’t have to be a veteran to use the FHA 203(k) loan, but the FHA 203(k) loan requires a down payment for purchases. With an FHA 203(k) loan, you can finance the cost of rehabbing a property into your purchase or refinance loan. Like the VA renovation loan, you’ll be limited in the cost of renovations based on the projected value of the property. This is a longstanding program with relatively inclusive qualification standards, so finding a lender for an FHA 203(k) loan may be less of a challenge than the VA renovation loan.

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