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VA Renovation and Rehab Loans: Can You Purchase a Fixer-Upper?

You’ve found the perfect house in the perfect location, but it needs a few repairs. You’d like to take advantage of your benefits by securing a VA-backed loan, but can you buy a fixer-upper with that financing?

Can You Buy a Fixer-Upper with a VA Loan?

You can use a VA rehab and renovation loan to buy a fixer-upper, as long as you meet all the necessary VA mortgage requirements. A VA rehab and renovation loan is a great option for Veterans and service members in need of home repairs but may not have the funds.

What is a VA Renovation Loan?

A VA renovation loan, also called a VA rehab loan, allows home purchase and renovation costs to be rolled into a single mortgage.

Standard VA loans will not allow borrowers to finance the cost of repairs, but VA rehab and renovation loans can be used to finance the cost of repairs and home improvements at the time of purchase.

While there’s no specified limit on the cost of repairs that can be financed with a VA rehab loan, most lenders will only finance an amount that is at or below the home’s projected appraised value after the repairs have been completed.

VA Rehab and Renovation Loan Eligibility

VA rehab loans share many of the same eligibility requirements as a standard VA loan. The following must be met to quality for VA rehab loans:

Certificate of Eligibility

A Certificate of Eligibility is required to demonstrate your service history and military qualifications. Typically, your lender will be able to help you retrieve your COE.

Credit Requirements

The VA doesn't set a required minimum credit score, but your lender will. Most VA lenders like to see credit scores in the 620-650 range. Some lenders may require a higher credit score for VA rehab loans due to the extra liability.

Debt-to-Income Ratio

VA-backed loans generally allow for a maximum DTI of 41%. Lenders sometimes make exceptions to this requirement.

Primary Residence

To qualify for that rehab loan, you must use that home as your primary place to live. You will not qualify for the loan if it is for an investment or vacation property.

Contractor Requirements

The contractor hired for the rehab must have a valid VA builder ID, and must complete improvements within 120 days of the loan's closing. Additionally, a post-repair inspection must be conducted to ensure repairs meet the VA's Minimum Property Requirement (MPR) standards.

Allowable Improvements with VA Rehab Loan

To include repairs costs in a VA renovation loan, the improvements must be designed to improve the home’s livability, safety and function. However, those repairs cannot significantly alter the structure of the original layout of the home.

For example, adding a backyard pool may add value and function to the home but wouldn’t be approved under a VA rehab loan. It would be considered a “luxury improvement,” as opposed to a renovation.

Likewise, costs associated with building a new room might improve the home's livability. But it wouldn’t be approved because the work would be considered an “addition,” not a needed repair of the existing structure.

You can use VA home renovation loans for the following:

  • Add new windows, doors, insulation or siding that will protect the exterior and minimize air leaks
  • Treat or remove mold, lead paint, asbestos or other toxic substances
  • Reinforce or replace flooring or carpeting
  • Repair or update plumbing and electrical systems
  • Install energy efficient fixtures
  • Add accessibility features, such as entrance ramps, grab bars or roll-in showers

Any approved renovations must become a permanent part of the property and be completed within 120 days of closing.

Pros of VA Renovation Loans

In addition to the advantages of standard VA loans, such as lower interest rates and easier qualification terms, VA renovation loans can offer some enticing benefits for qualifying borrowers.

All-in-One Loan Structure

With traditional VA loans, financing is limited to the purchase price of the property. With VA renovation loans, you can borrow up to 100% of the updated property value, allowing you to easily fund needed repairs.

Zero Down Payment

Admittedly, this is a benefit of standard VA loans as well, but it’s a great benefit that it bears repeating. VA renovation loans also include zero down payment, allowing you to keep more money in your pocket at closing.

Potentially Higher Sale Price

If/when the time comes to sell your home, the improvements you made to the home could significantly increase the value of your home at an affordable cost.

Financing energy efficient renovations can help save money on utility costs over the life of your loan. This can add up to significant cost savings on a 30-year loan.

Purchasing Flexibility

Instead of scouring available listings to find that perfect move-in-ready home, you can broaden your home buying horizons and consider fixer-upper properties that allow you to stay within your budget.

Cons of VA Renovation Loans

While VA renovation loans offer many perks, they aren’t for everyone. Here’s some disadvantages to consider.

Limited Availability

Many VA lenders do not offer VA renovation loans. The pool of VA renovation lenders is small, so you may have a harder time finding a lender in your area.

Higher Qualifications

Because the lender pool is smaller, those who offer this financing can afford to be picky. Managing necessary repairs that meet VA standards also requires an added layer of responsibility, so many VA renovation lenders look for higher credit scores or additional documentation to secure the deal.

Renovation Limitations

The VA does not issue a ceiling limit on repair or renovation costs, but renovations are limited by other factors. First, not all repair costs are approved, and the list of allowable repairs is limited to fixes that will improve the overall living quality and safety of the property.

Second, the renovation costs must be justifiable in the post-renovation property value. Even if a renovation would otherwise be approved, it will only be approved for the amount that it adds to the appraised value of the property.

VA Home Renovation Loan Alternatives

If the restrictions on VA renovation loans aren’t a good fit but you need a loan solution that allows for unrestricted repairs, you may want to consider these VA renovation loan alternatives.

Special Adapted Housing Grants

Some necessary repairs, such as accessibility upgrades, are often more costly than the value they add post-upgrade. Disabled veterans needing significant adjustments to continue living in their homes should consider VA housing grants designed specifically for this purpose. There are multiple grant options, depending on your specific circumstances.

VA Cash-Out Refinance

If you already have equity in your home, a VA cash-out refinance can fund renovations without the restrictions of a renovation loan.

VA Energy Efficient Mortgage (EEM)

If your planned home improvements are primarily energy efficient upgrades, a VA EEM may be better for your needs. Upgrade costs can be rolled into an existing VA mortgage, and the upgrade limitations are generally less restrictive than with a VA renovation loan, as long as you can prove that the planned upgrades will lower utility costs.

Home Equity Loan

Home equity loans come in a few different packages, but generally they involve adding a second lien on your property to borrow against the equity you’ve accrued over time. Home equity loans can be less restrictive than VA renovation loans in how you use the money once approved, but the approval process can be more stringent and interest rates are generally higher than VA-backed loans.

FHA 203(k) Loan

VA renovation loans are actually the VA’s response to the FHA 203(k) loan. A 203(k) loan is a combination of property purchase/repair costs in a single mortgage, but it is backed by the Federal Housing Administration (FHA) instead of the Department of Veteran Affairs (VA).

FHA 203(k) loans are available to civilians and military personnel alike, but FHA loans, including the 203(k), require a minimum down payment of 3.5% for approval.

Expand Your Options with a VA Renovation Loan

While there are limitations to consider before opting for a VA renovation loan, it could help you qualify for additional properties that might otherwise be outside the scope of a traditional VA loan. Talk to a VA lender today to learn more about how a VA renovation loan can help you find and develop the property of your dreams.