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What is a Supplemental VA Loan?

Veterans who want to buy a home using a VA home loan look for the house they want to buy, apply for the loan, get the loan amount approved, and close the deal. The process, once that’s finished, would seem to be over until the borrower decides he or she wants to refinance or sell the property. But veterans also have the option to apply for something called a VA Supplemental loan, which the VA offers as a way to help homeowners repair or improve their home.

Supplemental VA loans are offered with the following requirements; “The residential property must secure an existing VA-guaranteed loan, and be owned and occupied by the veteran, or the veteran will reoccupy upon completion of major alterations, repairs, or improvements.”

Note the language of the first part of the requirements–VA regulations don’t allow a supplemental loan guaranteed by the VA to be issued for homes purchased with conventional loans.

As with other VA loan products, the VA has rules on how Supplemental loan funds may be used. Since VA Supplemental loans are for property alterations, repairs or improvements, those improvements are required to “be for the purpose of substantially protecting or improving the basic livability or utility of the property…” VA rules also require those alterations to be “restricted primarily to the maintenance, replacement, improvement or acquisition of real property, including fixtures.”

Unfortunately for some, the VA also adds, “Installation of features such as barbecue pits, swimming pools, etc., does not meet this requirement”.

The VA does allow some of the loan proceeds to be used for improvement or replacement of what the rulebook calls “non-fixtures or quasi fixtures” that include refrigerators, washing machines, heating equipment and other items. The VA requires any use of Supplemental loan funds for these purposes to be “related to or supplement the principal alteration for which the loan is proposed.”

When applying for a VA Supplemental loan, the borrower must be current on all loan payments, taxes, insurance and must not “otherwise be in default unless a primary purpose of the supplemental loan is to improve the ability of the borrower to maintain the loan obligation.” That’s an important thing to keep in mind–according to that statement in the VA rules, a supplemental loan could be a way to avoid default or foreclosure under the right circumstances.

That said, the VA does not allow a supplemental loan that would increase the interest rate of the current VA mortgage–VA rules say, “A supplemental loan to be written at a higher rate of interest than that payable on the existing loan must be evidenced by a separate note from the existing loan.”