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In 2014, the department of Veterans Affairs came out with a new renovation loan product for veterans looking to refinance (or purchase) and renovate a home all in one loan: the VA Renovation loan.
VA Renovation loans give veteran homeowners added borrowing power, because they’re based on the “after renovation value” of your property.
You’ve grown to love where you live, but you’ve outgrown your home. You could move, but it may mean choosing between the right home and the right neighborhood. So you’re considering a major renovation project, but don’t really know what your financing options are.
Chances are you’ve heard of VA loans, but aren’t sure how the renovation version of these loans work.
In this guide, you’ll learn about what VA Renovation loans are, as well as learning about RenoFi Loans, an alternative that could be better suited to your needs.
We’ll look at:
A VA Renovation loan might not be the best way for you to finance your home purchase and renovation.
Speak to a RenoFi Advisor today to talk through your options.
What Are VA Renovation Loans?
VA Renovation loans allow you to finance the purchase or refinance and renovation of a home in a single loan.
This mortgage product lets you borrow against your home’s future value, increasing your borrowing power when compared to a traditional home equity loan or line of credit.
Whether you’ve fallen in love with a fixer-upper and want to purchase the house and turn it into your dream home, or have a lengthy wishlist of renovations to turn your existing property into the perfect space for you and your family, these loans can help you to do that now.
Just think about it this way…
You either buy a new house that you’ve found using a traditional mortgage, carry on living in your existing home knowing it needs work, carry out renovations a bit at a time over many years, or you find a financing option that lets you do everything right away.
And the extra borrowing power that comes with borrowing against your home’s future value makes it easier to get the full amount you need now, rather than having to make compromises on which projects you undertake and which have to wait until another time.
Key Points of VA Renovation Loan
You borrow based on your “after renovation value” (ARV) - This biggest differentiator of VA Renovation loans versus traditional secured loans is that they’re based on the ARV, or after renovation value, of your home; not the home’s current value.
This allows homeowners like you to significantly increase how much you can borrow to remodel.
It replaces & pays off your existing mortgage - If being used to renovate an existing home, you will be required to refinance your existing mortgage when taking out a VA Renovation loan.
And in order to do so, you have to pay it off. Both of these renovation loans include the additional funds to cover the balance of your first mortgage, plus the cost to cover the renovations and any closing costs.
Your GC must be registered with the VA - While these loans don’t require a consultant like many other renovation loans, you must use a contractor registered with the VA, and can only use a VA appraiser.
There’s no down payment or mortgage insurance - Unlike other types of loans, VA Renovation loans do not require any sort of down payment or mortgage insurance.
How Much Can You Borrow with a VA Renovation Loan?
For primary residences, VA Renovation loans let you borrow up to $50,000 for allowable repairs, however the total mortgage loan limit is $548,250. It’s important to note that the maximum repair amount is lower than other renovation loans, so if you’re planning a major remodel, this might not be the best loan option for borrowers.
How Do VA Renovation Loans Work?
If you’re looking to get a low interest rate and combine renovation financing and your primary mortgage into one loan, this might be a good option for you.
Here’s how the process works if you’re renovating a home you’ve already purchased…
- Make a list of the specific renovations you want to do.
- Hire a VA registered contractor and architect and finalize your renovation plans and submit these to your chosen lender. With these types of loans, you’ll need to make sure that you know exactly what you want to do, and the budget, before you submit the plans.
- The lender will then hire an appraiser from the VA to review your renovation plans and evaluate your current home to determine your home’s after renovation value and whether you qualify for a VA renovation loan. Unlike FHA 203k loans, the VA does not require a consultant to manage the process.
- After the loan closes, the lender will place the renovation funds in an escrow account.
- The lender manages draws based upon these inspections (intervals at which contractors can request funds). Every lender will have different rules surrounding the number of draws and inspections. These inspections are carried out to determine where a project is in relation to the proposed timeline and that the construction work matches the initial plan. Then when renovation work is completed, a VA inspector will conduct a final inspection to check that the project has been undertaken to the original specification and release the final funds to your contractor.
What Do I Need To Apply For VA Renovation Loans?
For VA Renovation loans, prior to closing on the loan, you’ll need to provide:
- Cost Estimate - a formalized estimate written by your contractor.
- Income & Asset Verifications - bank statements, paystubs, W2s, & tax returns.
- Title Insurance & Title Report
- Homeowners Insurance - this may require both builders risk and standard insurance depending on loan amount.
- Proof of Veteran Status- You’ll need a Certificate of Eligibility to take on a home loan sponsored by the VA that proves your veteran status.
To learn more about cost estimates, income & asset verifications or homeowners insurance, take a look at RenoFi’s Application Checklist Guide. Many of the documents required to apply for a RenoFi Loan are the same for VA Renovation loans.
VA Renovation Loan Requirements
Obviously, VA Renovation loans are intended for veterans. But there are some other requirements and veteran statuses to be aware of.
To qualify for this type of loan, you must be part of one of these groups:
- Active service members
- Surviving spouses
There are some other factors that could disqualify you from a VA Renovation loan:
- Working with a contractor that’s not approved by the VA
- Credit score below 620 (Can vary by lender, some will require 660+)
- Renovating an investment property or second home
- You’re doing the work yourself
- Completing repairs that are considered “luxury”
- You’ve lived in the home for less than one year
The best way to find out if a VA Renovation loan is a good fit for you is to find a lender and get pre-qualified. Every lender will have their own “overlays,” or specific qualifications, that could affect whether you’re eligible - like a higher credit score, for example, or closing costs.
How Do VA Renovation Loans Compare to RenoFi Loans When Renovating?
Here’s a side-by-side comparison on what you need to know to compare these loans and decide which loan is better for you:
|Va Renovation Loan||RenoFi Loan|
|Eligible property types|
|Credit score required||620+ (Can vary depending on lender)||640+|
|Max debt-to-income ratio||50%, or meet Automated Underwriting System (AUS) approval.||45%|
|Mortgage limits||$548,250. ($822,375 in high-cost areas.)||$500,000|
|Time limits||Renovations must be completed within 120 days||Renovations must be completed in 2+ years (depends on lender)|
|Restrictions on improvements||Yes, no additions or luxury/aesthetic updates.||No|
|Mortgage position||First position||Second position home equity loan|
As you can see both types of renovation loans have similar requirements and allow you to complete a wide range of projects.
The main difference between these two loans is their position and maximum loan amount: VA Renovation loans are a first mortgage product, and RenoFi Loans are a second mortgage product.
VA Renovation Loan Vs. RenoFi Loan: Which Is Right For You?
If you’re a veteran looking to combine a VA home loan with a renovation loan, a VA Renovation loan is a great option.
- Repair costs are more than $50,000
- You’re looking for a loan right now
- You’re making aesthetic improvements
- You need an addition
- You’re making major structural changes
You cannot use a VA Renovation loan and should consider other loan options.
What Are The Downsides of VA Renovation Loans?
There are some other negatives to VA Renovation loans when you’re planning to renovate your home.
- Hard to find a lender/get information: Unfortunately, there are very few lenders that offer VA Renovation loans. Those that do don’t often advertise this option online. This means it can be difficult to shop around and find the right lender. Each lender will have different terms, fees and processes associated with their lending called “overlays” that can be confusing to navigate. Out of all the renovation loan options available, VA Renovation loans are potentially the most rare.
- Forced to refinance: If you’re looking to renovate your current home, you’ll be forced to refinance your first mortgage for this type of loan. That may not be a smart choice in the current rate environment, especially if you’ve already locked in a great low rate and don’t want to pay closing costs on a refinance.
- Many types of repairs aren’t covered: Similar to FHA 203k loans, VA Renovation loans do not allow aesthetic repairs, addition projects, or projects that cost more than $50,000. If these limits are going to affect your project, you may want to look into a different renovation loan option.
You need to make sure you’ve explored all of your options before choosing the best way to finance your renovation.
Homeowners aren’t always aware of all of the renovation loan options that are available, and that’s where we can help.
So what are the benefits of RenoFi Loans?
Introducing RenoFi Loans - An Alternative To VA Renovation Loans
If you’re considering a VA Renovation loan to purchase a fixer-upper and pay for repairs or to refinance and renovate your existing home, a RenoFi Loan could be a better alternative.
A RenoFi Loan is a newer type of home renovation loan that can provide the ease of a home equity loan with the borrowing power similar to other renovation loans.
This means that RenoFi’s Renovation Home Equity Loan can offer the same benefits of VA Renovation loans without the need to refinance.
Here’s how RenoFi Loans compare to other home renovation loan options, like HomeStyle and 203ks:
|RenoFi Renovation Home Equity Loan||Single-Close Construction To Permanent Loan (CTP)||Fannie Mae HomeStyle Loan||FHA 203k (Full)||Two-Close Construction To Permanent Loan (CTP)||Freddie Mac Choice Renovation Loan||VA Renovation Loan|
|Is this a mortgage?||Yes||Yes||Yes||Yes||Yes||Yes||Yes|
|1st or 2nd mortgage?||2nd||1st||1st||1st||1st||1st||1st|
|Require refinance of existing mortgage?||No||Yes||Yes||Yes||Yes||Yes||Yes|
|Typical Interest Rate||Market||Above Market||Above Market||Above Market||Above Market||Above Market||Market|
|Loan Limit (Renovation Cost + Mortgage)||$500,000||Jumbos allowed||Conforming only||Conforming only||Jumbos allowed||Conforming only||Conforming only|
|Loan Term (max)||20 years||30 years||30 years||30 years||30 years||30 years||30 years|
|Credit Score Required||640+||700+||620+||580+||580+||660+||620+|
|Loan to Value||Up to 95%||Up to 95%||Up to 95%||Up to 96.5%||Up to 80%||Up to 95%||Up to 95% (90% if refinancing)|
|Can be used for building new home?||No||Yes||No||No||Yes||No||No|
|Restrictions on type of improvements?||No||No||No||Yes||No||No||Yes|
The main things you need to know about RenoFi Home Equity Loans are:
- You can borrow between $20k and $500k
- Terms of up to 20 years
- Ability to borrow up to 95% of your home’s after renovation value
- The full loan amount is available at closing
- You won’t need to refinance your existing mortgage
A RenoFi Loan can help you to borrow the most money for your renovation with the lowest monthly payments. You also won’t have to deal with specified draws after you close on the loan, the money will go straight to you and you can pay your contractor directly.
Schedule a call (or chat online) with one one of our advisors today and they’ll be more than happy to look at your options with you and talk you through how this could be better for you than a VA Renovation loan.