VA renovation loan: How to qualify and apply

If you’re looking to buy a home that needs major renovations and you’re eligible for a Veterans Affairs (VA) loan¹, a VA home renovation loan could be the answer. This type of mortgage can help you buy the home and pay for renovations with just one loan, which means you won’t have to juggle multiple payments.

Veterans renovation loans are available to eligible military personnel, veterans, and their surviving spouses. While Rocket Mortgage offers standard VA loans, it does not provide VA renovation loans. Rocket Mortgage also does not offer home equity lines of credit (HELOCs). However, exploring the requirements, pros, and cons of these loans and their alternatives can help you choose the right mortgage option for your needs.

Key takeaways:

• A VA renovation loan allows eligible military buyers to finance both their home purchase or refinance to make necessary home repairs within a single mortgage.
• Eligible borrowers can take advantage of VA benefits, including no down payment requirement and no private mortgage insurance.
• You must use a VA-approved contractor and can only fund repairs that improve safety and livability, rather than luxury upgrades.

What is a VA renovation loan?

A VA renovation loan is a mortgage backed by the U.S. Department of Veterans Affairs that allows you to roll the cost of purchasing a property and the cost of repairing it into one single mortgage.

These home improvement loans are offered to eligible military servicemembers, veterans, and their surviving spouses. VA renovation loans are designed for buyers who want to purchase a fixer-upper but who may not have the liquid cash required to fund construction out of pocket.

These mortgages offer the signature benefits of standard VA loans. They typically do not require a down payment or private mortgage insurance, and they feature relatively low interest rates compared to traditional non-VA loans. VA renovation loans empower buyers who don’t have much saved for a down payment or renovations to buy a home and fix it up.

VA renovation loan vs. VA purchase loan

There are different types of VA loans. VA renovation loans are a type of VA purchase loan, meaning they come with all the benefits and fundamental requirements as a standard VA loan. A VA renovation loan can be used for both a new home purchase and a refinance if you want to improve a home you already own.

Like a typical purchase-only VA loan, VA renovation loans allow borrowers to purchase a home with no down payment. You also pay a one-time VA funding fee that typically ranges from 1.25% to 3.3%, depending on your down payment size and whether it is your first time using a VA loan. This fee can be rolled into the loan along with your closing costs.

With a VA renovation loan, because you’re also getting funds to pay for repairs, there is a stricter qualification process. You’ll need to get precise quotes from licensed contractors and VA approval for your planned improvements. You’ll also need to have a VA appraiser determine what the value of the property will be once the work is completed.

Which properties and renovations qualify for a VA renovation loan?

Not every home or project is a perfect fit for this program. To protect your investment, the VA outlines specific parameters for property types, allowable upgrades, and maximum borrowing limits.

Property type

VA loans are intended to be used exclusively to buy a primary residence. This includes a property with up to four units, if you plan to live in one of them as your main home.

The VA loan occupancy rules state that you must make the home your primary residence for at least a year. However, there are important exceptions for certain military professionals, such as active-duty service members who receive deployment orders and must leave home temporarily. Often, a spouse can fulfill the occupancy requirement on their behalf.

After you fulfill your residency requirement, you’d be free to rent out the unit where you were staying, purchase another multiunit home, and repeat the process again.

Allowed improvements

VA renovation loans can be used only for repairs or upgrades that make the home more useful, livable, and safe. You cannot use these funds for luxury additions like swimming pools, outdoor kitchens, or elaborate landscaping.

According to the VA, the alterations and repairs must be those typically found on comparable properties in your immediate area.

Common alterations and repairs that qualify for renovation and remodeling include:

• Heating and cooling system repairs or replacements
• Foundation repairs
• Updated flooring or roofing
• Electrical or plumbing system repairs and replacements

Your lender can provide more information on what exactly qualifies as a permissible improvement or repair. All work must typically be completed within 120 days of closing. Builders are no longer required to have a VA-issued identification number, but they still need to meet any state and local licensing requirements.

Maximum renovation cost

VA renovation loan lenders typically have a limit on how much they’ll lend for repairs and improvements. This maximum renovation amount is often capped at $50,000, but it depends on the lender.

So, if you wanted to buy a house for $300,000 and your lender has a limit of $50,000 for repairs, the most you’d be able to borrow is $350,000.

Because VA loans do not require a down payment, you can get a VA renovation mortgage with a loan-to-value ratio (LTV) of up to 100%. If you’re refinancing, your loan-to-value ratio must be 90% or less.

For both purchases and refinances, you will be able to borrow the lesser of two amounts - the home’s sale price plus the cost of your proposed renovations, or the estimated value of the home once those renovations have been completed.

To see how these costs break down, consider using this mortgage calculator from Rocket Mortgage to assess the affordability of your VA loan.

What are borrower requirements for a VA rehab loan?

Securing a VA rehab loan requires proving your military eligibility and demonstrating strong financial health. Here is what lenders look for.

Minimum service requirements

First and foremost, this means that you’ll need a certificate of eligibility (COE), which certifies that you meet the minimum service requirements based on your military status and time served. You can request a COE easily online through the VA's eBenefits portal or ask your lender to pull it for you.

Veterans or active-duty servicemembers are generally eligible for a VA loan if they’ve served 90 consecutive days of active service during wartime or 181 days during peacetime. The minimum service requirement for National Guard or Reserve members is 6 years. Qualifying surviving spouses are also eligible for a VA loan.

The VA will guarantee a specific amount of money on a borrower’s VA loan. This is known as the VA loan entitlement. Your COE will detail exactly how much entitlement you currently have available.

Financial criteria

In addition to meeting basic service requirements, you’ll also need to meet your lender’s credit standards. If you fall short in one area, some lenders allow compensating factors - like robust cash reserves - to help demonstrate your ability to afford the loan.

• Credit score: The government sets no minimum VA loan credit score for the loans it guarantees. However, lenders can and usually do have their own requirements. You’ll likely need a credit score of at least 620 to get a VA renovation loan.
• Debt-to-income ratio: The VA itself doesn’t set a maximum DTI, but lenders may establish their own limit. A typical maximum debt-to-income ratio for VA loan approval is 41%.
• Income: You’ll also need to be able to show a reliable source of income that is sufficient to repay your loan. The VA also enforces strict residual income requirements, ensuring you have enough money left over each month after major expenses to comfortably cover living expenses. Strong residual income can act as a compensating factor if your DTI is slightly high.

Pros and cons of the VA renovation loan

A renovation loan is a fantastic tool, but it is not a perfect fit for everyone. Here is a brief look at the primary advantages and drawbacks.

Pros

Here are some key advantages of a VA renovation loan:

• Only one loan to manage: Rather than getting separate loans for the purchase and renovation, you’ll have just one loan to cover both the purchase price and your repair costs.
• More home options: If you’re struggling to find a move-in-ready home that fits your budget, a VA renovation loan might be a helpful option, since it allows you to purchase a fixer-upper and gives you the funds to renovate. This is especially helpful in competitive housing markets.
• Borrow the as-completed value: Most mortgage amounts are based on the current value of the property in question. With VA renovation loans, loan amounts are based on the value of the property after improvements have been completed, as determined by a VA appraiser.
• Perks compared to some alternative loans: With a VA loan, you may qualify for no down payment, no mortgage insurance, better rates, and a streamlined process. These are significant benefits as compared to other types of home improvement loans.

Cons

While a VA renovation loan offers perks, be sure to consider the following drawbacks:

• Fewer lender and contractor options: Not all lenders offer VA construction loans. You’ll also need a licensed contractor who is experienced working with this type of financing.
• Limited allowable improvements: VA renovation loans can be used only for repairs and upgrades that improve the safety and livability of the home. They can’t be used for luxury improvements.
• Maximum repair limits: If you’re looking at buying a house in need of expensive repairs, you might not be able to find a lender who will lend you enough to cover the cost of those repairs.
• Inability to exceed the home’s as-completed value: A VA loan can only be for the lesser of the home’s after-repair value or the total purchase price plus renovation cost. If the total cost to purchase and repair your home exceeds the property’s after-completed value, you may need to bring out-of-pocket cash to closing to cover the difference.

How to get a VA home remodel loan

The process to get a VA home remodel loan is like obtaining a VA purchase loan and includes these basic steps:

1. Assess your eligibility: Start by verifying your military service requirements and pulling your COE. Review your credit score, savings, and monthly debts to ensure you can afford your new mortgage payment.
2. Find a participating lender: Not all lenders offer VA renovation loans. Take the time to shop around, compare interest rates, and ask specific questions about their experience with the VA renovation process.
3. Obtain quotes from contractors: The VA will need to sign off on your construction plans, and you’ll need to know how much everything will cost to determine your loan amount.
4. Have a VA appraisal completed: Your lender will work with you to schedule a VA home appraisal, which will be completed by a VA-certified appraiser. You'll need to pay the VA appraisal fee as part of your overall VA loan closing costs. This appraiser will determine the as-completed value, or what the value of the property will be after all repairs and improvements are completed.
5. Begin the repairs after closing: After closing, you will be responsible for ensuring that the contractor is completing the renovations. Your lender will be responsible for managing and disbursing the repair funds in stages.
6. Get a final inspection from the VA appraiser: A VA appraiser will confirm that the project has been successfully completed and that the home conforms to strict VA loan inspection requirements.

What are alternative home improvement loans?

Because VA renovation loans can be difficult to find and aren’t always the best fit for home buyers and owners – especially those looking to make significant repairs. It might make sense to consider some alternative financing options:

• VA cash-out refinance: A VA cash-out refinance can be a good option if you are looking to refinance and borrow against the equity from your home. Your existing mortgage is replaced by a new, larger one, and you withdraw the difference in cash to cover repairs.
• VA energy-efficient mortgage: An energy-efficient mortgage is a loan that allows you to finance energy-efficient improvements in the same loan as your home.
• FHA 203(k) loan: An FHA 203(k) loan is like a VA renovation loan, but it runs through the Federal Housing Administration instead of the VA.
• Fannie Mae HomeStyle Renovation mortgage: A Fannie Mae HomeStyle Renovation loan is another option to get one loan for the purchase and repair costs, operated by Fannie Mae.
• Home equity loan²: A home equity loan allows you to get a fixed loan amount, using the equity in your home.
• Home equity line of credit: Like a home equity loan, a home equity line of credit allows you to access the equity in your home. But unlike a home equity loan, a HELOC allows you to access (and pay for) the money you need over time. Rocket Mortgage does not currently offer HELOCs.
• Personal loan: A personal loan may be another option to help you finance repair costs. Unlike other options, a personal loan may be unsecured and not require your home as collateral.”

FAQ

Here are the answers to some frequently asked questions about VA renovation loans.

When is a VA home renovation loan a good idea?

A VA renovation loan can be a great financing option if you qualify for a VA loan and you find an affordable fixer-upper that only requires minor to moderate structural or safety repairs. VA home renovation loans come with a variety of perks like no down payment requirement, which makes them ideal for buyers who don’t have much in savings.

Can I get a VA renovation loan for two primary residences?

You cannot have two VA loans for two primary residences at the exact same time. However, if you receive military orders to relocate, you can restore your entitlement or use your remaining entitlement to buy a new primary residence in your new location.

How hard is it to get a VA renovation loan?

VA renovation loans are slightly harder to secure than a standard VA loan because you must meet VA eligibility requirements and not all lenders offer this mortgage type. You also must submit detailed renovation plans for approval. If your mortgage application is denied, there are steps you can take to boost your eligibility.

How can I get the best rate on a VA renovation loan?

To get the most competitive VA mortgage rate, focus on improving your credit score, lowering your overall debt-to-income ratio, and shopping around to compare offers from multiple VA-approved lenders.

The bottom line: VA renovation loans can be a helpful option for those who qualify

VA loans come with many great benefits that help make home buying more affordable. A VA renovation loan can be very useful to current service members or veterans looking to make repairs on their new or current homes. However, it can be tricky to find a lender that offers them.

To find the best fit for your situation, you can explore different options that are available to you, whether it be a VA renovation loan, a conventional mortgage, a personal loan, or a home equity loan.

If you decide that a home equity loan is the right choice for you, you can apply for a home equity loan with Rocket Mortgage today.

¹ Rocket Mortgage is a VA approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.